I had a reader write in recently and ask me to do a post on ABLE accounts. It isn't very often that I get embarrassed at not knowing a financial term. 2 minutes later, I not only knew what an ABLE account was, but knew that a post on them was a very good idea. When I couldn't talk the reader into doing it as a guest post, I settled down to do a little research myself.
The ABLE Act
The Stephen Beck Jr. Achieving a Better Life Experience (ABLE) Act (Section 529A) was enacted by Congress in December 2014 in order to provide a tax advantage to the disabled and those who care about them.
What is an ABLE Account?
An ABLE account is best thought of as a state-administered (like a 529) Roth IRA with a $15K annual contribution limit and no Age 59 1/2 rule designed to provide money for living expenses of people who are mentally or physically disabled at a young age.
What Are the Rules?
The rules are actually pretty straightforward. It only takes a few minutes online to learn them all. There are plenty of good resources out there once you know to go looking for them. The main reason I'm doing this post is that the word about this special account has certainly NOT gotten out.
# 1 Beneficiary Must Be Disabled Before Age 26
The beneficiary must be
- Eligible for Social Security Income for disability or blindness that began prior to Age 26 or
- Eligible for disability insurance benefits (DIB), childhood disability benefits (CDB), or disabled widow's or widower's benefits (DWB) based on disability or blindness that began prior to Age 26 or
- Someone who has certified or whose parent/guardian has certified that he/she has a “medically determinable impairment meeting certain statutorily specified criteria” or is blind and it occurred prior to age 26.
So basically, disabled by government criteria before age 26.
# 2 Anyone Can Contribute Up to $15,000 Per Year Per Beneficiary
Anyone can contribute to an ABLE account, but the total contribution per beneficiary can only be $15,000 per year, the same as the gift tax exemption. But it's not $15,000 from one parent and $15,000 from another like a 529. It's $15,000 total, even if a dozen people are contributing. The beneficiary can also contribute $12,060 of their own earnings in addition to $15,000 for a total of $27,060.
# 3 Must Be Established by Someone With “Signature Authority”
The account must generally be opened and maintained by a parent, guardian, or designated agent-i.e. someone with “signature authority.”
# 4 Withdrawals can be made by EITHER the beneficiary or the Signature Authority
If you don't want your special needs kid to be able to access the money on his or her own, this isn't the account for you.
# 5 You Can Change Beneficiary/Do a Rollover
Did you put more money in there than your first disabled child will need? Feel free to roll some into his sibling's ABLE account.
# 6 Few Limitations on Withdrawals
There are precious few limitations on what the money can be used for and when it can be withdrawn. No age limits and the only real rule is that it has to be spent for the benefit of the beneficiary. This includes the following uses:
- Housing (includes rent, mortgage, property taxes, and utilities)
- Employment training and support
- Assistive technology and related services
- Prevention and wellness
- Financial management and administrative services
- Legal fees
- Expenses for ABLE account oversight and monitoring
- Funeral and burial
- Basic living expenses
That's a pretty darn comprehensive list. You can basically spend it on anything.
# 7 Total Amount in ABLE Account = Total Amount Allowed in 529s in That State
Like a 529, when the account gets to a certain size you can't contribute any more. That amount is state-specified, but typically in the $350K range.
# 8 Only One ABLE Account at a time
You can't open ABLE accounts in multiple states like you can 529s. But just like with a 529, you don't have to use your state's ABLE account. A few states offer a state tax deduction or credit for contributions (see below for list.) There is also talk about increasing the age limit to 46, allowing beneficiary earnings to be contributed to the account above and beyond the $15K limit [Update: Now law], and to allow 529s to be rolled into ABLE accounts (i.e. you realize your special needs kid isn't going to Harvard after all) [Update: Also now law, giving a way to supercharge these accounts by overfunding their siblings' 529s.]
# 9 Estate Planning Issues
One unique little aspect of these account is that if there is anything left in it when the beneficiary dies, the state may (dependent on state law) be able to reimburse itself for Medicaid-related expenses from the time the account was opened until death before the remainder goes to the estate of the beneficiary.
# 10 Non-Qualified Expense Penalty
If you spend the money on something that doesn't qualify (a cruise? a pony? seriously I have no idea what wouldn't qualify under those broad categories) then you'll owe a 10% penalty, plus tax (I think just on the earnings but the answer to that question is really tough to find on the internet), and the money may reduce your eligibility for other government benefits like SSI and Medicaid.
Interacting With Other Benefits/Taxes
One thing that parents with disabled offspring are very much aware of is that there are lots of other helpful government programs (think Medicaid) and of course our progressive tax system that cares about how much income and wealth their child has. So they generally try to make their kid appear impoverished on paper. How will an ABLE account affect that? There is very little effect on income, as seen by these three rules:
- ABLE account contributions are not deductible, but they're not taxable income for the beneficiary either.
- ABLE account earnings are not taxable for the contributor, the signature authority, or the beneficiary.
- ABLE account distributions are not taxable for the contributor, the signature authority, or the beneficiary.
But there may be some effect when counting assets of the beneficiary. The following count as the beneficiary's assets:
- ABLE account balance over $100K
- Unspent ABLE account distributions not specifically designated for a qualified purpose
- Unspent ABLE account distributions designated for housing
- Distributions for a non-qualified purpose
Where Can/Should You Open An Account?
These things are pretty new, and as of last May, only 21 states were offering them. I'm sure that number will increase over time, but on the date I'm writing this, my state doesn't offer one. [Update: As of 2018, there are 39 states offering ABLE accounts, including Utah.] The good news is they all seem to offer great options from Vanguard, DFA, Fidelity, and Blackrock and some even offer a state tax break including:
So if you're in one of those states, use your own state plan. If you're in another state, I would recommend doing a little more research. Most states allow anyone to use their account, but the fees vary a bit. Typical fees include a $40-45 annual fee and maybe a $2 a month fee for a debit card. There may also be an asset-based fee, typically in the 0.35% range. In my brief period of research, Alabama, Missouri (for Missouri residents only), Nebraska, Tennessee, and Vermont (for Vermont residents only) deserve special consideration for lower fees.
What About A Special Needs Trust?
So how does an ABLE account interact with a trust? Well, there are at least two benefits you can get from a trust that you can't get from an ABLE account. First is a trustee that can keep the disabled person from getting the money and using it for whatever they want. The second is you can put a whole lot more money into a trust.
A trust, of course, costs a whole lot more to establish and maintain. I suspect most high-income professionals with a special needs child will use a combination of an ABLE account and a trust. Ed Slott compares them here.
What do you think? Do you have a special needs child? Have you used an ABLE account? Which state did you choose and why? Anything else readers should know? Comment below!