What is an ABLE Account? Definition, How It Works, and Considerations
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Summary:
An ABLE account, or achieving a better life experience account, is a tax-advantaged savings vehicle designed to assist individuals diagnosed with significant disabilities before age 26. Similar to 529 education savings plans, ABLE accounts allow for tax-free growth of funds, with contributions subject to annual limits. These accounts help individuals maintain eligibility for government benefits such as Supplemental Security Income (SSI) and Medicaid by excluding most funds from eligibility calculations. Tax reform measures have expanded the benefits of ABLE accounts, providing additional contribution options and eligibility for tax credits.
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An overview of ABLE accounts
Definition and purpose
An ABLE account, officially known as an achieving a better life experience account, serves as a tax-advantaged savings tool tailored to individuals diagnosed with significant disabilities before turning 26 years old. These accounts are established to aid disabled individuals in accumulating funds for essential expenses while safeguarding their eligibility for crucial government benefits.
Contribution limits and tax advantages
Contributions to an ABLE account are capped annually to ensure compliance with regulatory guidelines. As of 2023, the maximum annual contribution limit stands at $17,000. While contributions do not qualify for federal tax deductions, the funds within the account grow tax-free, akin to the growth observed in 529 education savings plans. Some states may offer tax deductions against state income taxes for contributions made to ABLE accounts.
How ABLE accounts work
Establishment and administration
ABLE accounts are established and managed at the state level, with each state administering its own program. Funds deposited into these accounts are invested and accrue tax-free growth, provided that distributions are utilized for qualified disability expenses. These expenses encompass a broad spectrum, including education, housing, transportation, medical care, and legal fees, among others.
Impact on government benefits
One of the primary benefits of ABLE accounts is their exclusion from eligibility calculations for government assistance programs like SSI and Medicaid. Funds held within ABLE accounts generally do not count towards asset thresholds set by these programs, allowing disabled individuals to save for essential expenses without jeopardizing their eligibility for vital benefits.
Tax reform and ABLE accounts
Changes introduced by the tax cuts and jobs act
The Tax Cuts and Jobs Act implemented significant changes affecting ABLE accounts, expanding their benefits and flexibility. Notably, beneficiaries can now contribute additional income to their accounts beyond the gift tax exemption limit, subject to specific restrictions. Additionally, ABLE account holders may qualify for the saver’s credit, providing further financial incentives for saving.
529 rollovers and other provisions
Furthermore, the 2017 tax reform introduced provisions enabling the rollover of funds from 529 college savings accounts to ABLE accounts, enhancing families’ flexibility in managing educational and disability-related expenses.
ABLE accounts vs. special needs trusts
Comparing features and benefits
Before the advent of ABLE accounts, families often relied on special needs trusts to provide financial support for disabled individuals. While trusts offer certain advantages, such as unlimited contributions and greater control over asset distribution, they can be complex and costly to establish. In contrast, ABLE accounts offer a more accessible and cost-effective savings option for families seeking to secure their loved one’s financial future.
Considerations and planning
For many families, ABLE accounts complement rather than replace special needs trusts, offering an additional tool for financial planning. While ABLE accounts have state-imposed contribution limits, they provide a valuable avenue for accumulating funds without jeopardizing eligibility for government benefits.
Frequently asked questions
Who is eligible to open an ABLE account?
Individuals diagnosed with significant disabilities before reaching age 26 are eligible to open an
ABLE account. Additionally, they must meet any eligibility criteria specified by their state’s ABLE program.
Can funds in an ABLE account be used for any expenses?
No, funds in an ABLE account must be used exclusively for qualified disability expenses. These expenses include but are not limited to education, housing, transportation, medical care, and legal fees related to the disability.
What happens to the funds in an ABLE account if the beneficiary passes away?
In the event of the beneficiary’s death, the state may file a claim to a portion or all of the remaining funds in the ABLE account to recoup Medicaid costs incurred during the beneficiary’s lifetime.
Key takeaways
- ABLE accounts provide tax-advantaged savings for individuals with disabilities.
- Contributions to ABLE accounts grow tax-free and are excluded from eligibility calculations for government benefits.
- Recent tax reforms have enhanced the benefits of ABLE accounts, offering additional contribution options and eligibility for tax credits.
- While ABLE accounts offer advantages over special needs trusts, both can play complementary roles in financial planning for disabled individuals.
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