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:
- Education
- Housing (includes rent, mortgage, property taxes, and utilities)
- Transportation
- Employment training and support
- Assistive technology and related services
- Health
- 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
Kids- You'd do anything for them
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:
- Iowa
- Michigan
- Nebraska
- Ohio
- Oregon
- Virginia
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!
Thank you! I have two kids with special needs and this is very helpful!
Wow. I’ve never heard of this, but have friends with special needs. Will put this on their radar. Thanks for the post!
Great article, but one small correction: the contribution limit has been raised to $15,000 beginning in 2018, consistent with the increase in the federal gift tax exclusion.
Thank you!
Great post, was thinking about writing you re: able accounts and then I got this email! I am a paraplegic and an orthodontist and just learned of this account earlier this year. Definitely going to take advantage of it! Couple additions to your post:
1) Michigan’s ABLE account is great, and allows for the first 5k of contributions to be deducted
2) as of 2018, the new limit is 15k/year
3) you can open your own account rather than having a parent or guardian do it
4) as of 2018, if you qualify for this account and also work, you can contribute up to another 12,060 of your own earnings to the account (total 27,060)
Thank you for all that you do!
Thanks for the correction and sharing your story.
Very timely article and nice succinct write up.
We have a young adult son with a lifelong disability who is able to work, but his eligibility for benefits is threatened if he maintains a bank account balance over $2K. We found out about the ABLE account from our estate planning attorney while having our trusts and wills updated. It is ideal for his situation and fortunately for us, NH just enacted their version into law on 12/15. I think we are the first in our state to sign up, and the enrollment was not difficult. I can’t yet speak to how it works, but here’s hoping!
Great article. Thanks for writing it. One additional fact, the new tax law allows rollovers from a siblings 529 into an ABLE account. You could for example overfund an able-bodied siblings 529 (say you’re not sure if they’re going to go to grad school), and then roll the excess funds into their disabled siblings ABLE account when they’re done with school.
That’s a slick trick. Thanks for sharing.
Just read this article yesterday and sent to to my friend who has a son with Downs: https://www.reuters.com/article/us-column-marksjarvis-able/families-can-pool-resources-for-disabled-in-able-accounts-idUSKBN1F72BD
In it they say you can convert a child’s 529 to an ABLE if you discover at a layer date they have autism, etc and don’t expect them to attend college (a strange example I thought). They did not however say where they got that bit of info- so it is possible that it is incorrect.
Odd that I’ve read two articles in as many days about this account but never heard of it before yesterday. My friend had however and actually has one in addition to their special needs trust.
No, it’s true.
You are correct that you can roll over funds from a child’s 529 college fund into an ABLE 529, a change allowed in the tax reform bill.
We are adopting a special needs kiddo this year and are opening an account in Ohio. There is a $2000 state tax deduction in Ohio.
Quick and simple way to compare plans here:
http://www.ablenrc.org/state-review
Glad to see a post on the topic of ABLE accounts. These have been great in the few years since they have been rolled out, at least here in OH. Since I work with quite a few families who have loved ones with special needs there are some parts of the ABLE act to be aware of. Probably the most important one not directly mentioned is once the balance gets above $100,000 the beneficiary loses SSI, which can be detrimental to many people. With the annual contribution limitations and how new this program is it will be some time before people hit $100,000, however, it is something to be aware of.
One thing to keep in mind is that the ABLE account is meant to provide funds that SSI etc. is also meant to provide for, e.g. housing, food, utilities, clothing. If a Special Needs Trust is used for such expenses then that trust is then assumed to be part of the beneficiaries funds and will then disqualify the recipient for SSI if the sum of the recipients and the SNT’s funds exceed $2000. Also, the SNT is supposed to keep a strict accounting of all funds distributed to make sure they are used only for special needs (like a trip, educational expenses, or a car), not for ordinary needs. This is why the ABLE account is so special-it can be used to supplement the recipients daily needs. The amount of dollars SSI provides for such is generally insufficient, and this can be a legal way to do so in a way that a SNT trust cannot.
We have a special needs three year old and live in Oregon. That challenge is, at least from a finance perspective, that the state tax benefit for the ABLE account is aggregated with the state tax benefit for the 529 account.
We already contribute an amount to her 529 account in order to get the maximum state tax break so contributing to her ABLE account will not provide additional tax relief. Given that we can convert her 529 to an ABLE account in the future means that I don’t see any clear advantage to utilizing the ABLE account over, or in addition to, the 529.
I suppose it could be an advantage to have additional tax protected space to invest for her future if we were already contributing the maximum allowable to her 529 but we are not in a position to save that much at this time.
If I am misunderstanding or missing a different strategy I would be grateful to be corrected.
Are you running into an issue where you want to contribute even more to the account than the state 529 limits? That’s a lot of dough, especially with two spouses. I mean, you can put in a “5 year” contribution of $150K. How much are you trying to get in there?
No. I would love to be able to save more for our daughter but all we can do right now is the $4660 a year that we put in her 529. The $4660 is the max Oregon will give a tax break for (10% state income tax so we get back $460).
I’m saying I don’t see why I would take any of that $4660 or any additional money and route it to an ABLE account right now when the 529 can be converted to an ABLE if she doesn’t go to school.
The point I was really trying to make is not even about the utility of an ABLE account just a personal finance point about the state tax break. I assumed that I would get an additional $460 tax break if I funded an ABLE account and was surprised/disappointed when I learned the 529 and ABLE contributions were “aggregated”.
I think you may be missing the point of setting up an ABLE account. From our personal experience, it is not meant to maximize your tax savings now, nor is it intended to be the primary monetary support for a disabled adult. Rather, it is a mechanism to allow the individual to save money, either from working or gifts, without putting his/her eligibility for benefits at risk for having too much in savings.
The only benefit for you would be the less restricted spending out of the ABLE account, but as you noted you can roll it over from the 529. As far as tax savings Oregon isn’t helping you out.
As others have mentioned, it is very important to keep in mind that one can’t have more than 100k in the account in ANY state as it will screw up SSI and other benefits, and in SOME states like say NY, the limit of the whole account is 100k.
https://www.osc.state.ny.us/savings/able.htm
So if your kid is young and you expect for that money to grow over decades, I think it at most makes sense to put a little bit of money there. Essentially if you have a toddler with close to 100k there, or even 50k, things can very easily backfire.
So I basically view this as an alternate of their individual savings account for a rainy day.
Do your recommendations regarding ABLE accounts differ if I am a disabled physician myself? Any specific state programs that you would recommend with low fees and good investing options?
Jeff-I really like the Michigan ABLE account (I am a disabled do as well). Make sure you qualify though. I believe your disability would need to happen prior to age 26.
Thanks for the info. I noticed VA’s account doesn’t have any monthly maintenance cost if you have at least $10,000 in their savings account.
Exactly. ABLE accounts are for your disabled kids, not you.
I don’t have any kids. I was disabled before age 26, so I believe I would qualify.
Jeff, To me “The White Coat Investor”‘s reply seemed insensitive, like pro kid, but anti disabled adult, especially as it did not answer your helpful add on reply of you being disabled prior to age 26.
To me it seems if a Adult of any age was Social Security Disabled or equivalent threshold standard, then even at age 60 or maybe any age latter even would qualify. They say its not counted for medicaid or SSI, wonder about SNAP?
Certainly didn’t mean to be insensitive to anyone.
By the way, I know you can’t see this on the front end, but I can on the back. The two Jeffs above are not the same person.
An ABLE account can be opened for someone who is over 26. They just have to be disabled before 26.
However, it’s probably a fairly unusual situation where someone opens and funds an ABLE account for themselves. The idea behind it (and what I meant to say with my comment) was that the way the ABLE account works for most people is that their family (usually parents) fund it for their disabled child.
But one can open, fund, and manage their own ABLE account. You kind of have to ask yourself though, if you are capable of opening, funding, and managing your own ABLE account, are you really going to qualify for the rather high threshold that Social Security disability requires? I’m sure there’s someone that does, but there can’t be that many people.
I sustained a spinal cord injury at the age of 20. Obviously it has resulted in significant disability but hasn’t prevented me from becoming a psychiatrist. Essentially from what I’ve read you just need your physician to sign off on a form to qualify for the ABLE account.
They say its not counted for medicaid or SSI, wonder about SNAP?
Does assets under 100K count for SNAP? If so then it would hurt snap recipients…
No, they don’t count toward assets or income when determining SNAP eligibility.
It is my understanding that if you roll 529 funds into the ABLE account, those funds will count toward that year’s annual contribution limit on the ABLE account. Is this your understanding as well? Based on the 2023 Secure Act 2 529 to Roth IRA conversion rules, I think this would be the case for 529 to ABLE conversions, but I haven’t found much online to clarify this. Also, if it is the case, it’s another reason that contributing to both the 529 and ABLE at the same time, might not matter in the end unless you have the option to change the 529 to another beneficiary.
Yes. That’s my understanding as well. Here’s a source from the Utah 529.
https://my529.org/how-to-save/rollovers/#:~:text=A%20rollover%20will%20count%20toward,(See%20Tax%20considerations%20below).