Everything you need to know about ABLE accounts | Savings and budgeting

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After nearly a decade of lobbying by disability advocacy groups, Congress passed the Achieving a Better Life Experience Act in 2014. The law, now known simply as ABLE, allows the creation of tax-advantaged accounts for people with disabilities, similar to 529 plans for college. Accounts allow eligible individuals to save money without compromising their eligibility for government programs.

“The advantage of using an ABLE account is that the income will not be used for means testing for (Supplemental Security Income) or Medicaid,” says Marc Scudillo, managing director of financial firm EisnerAmper Wealth Management and Corporate Benefits LLC. .

Despite their advantages, ABLE accounts are still not widely used or understood. Fewer than 57,000 accounts have been opened nationwide, according to the National Association of State Treasurers (at press time).

  • Why should someone open an ABLE account?
  • Who can open an ABLE account?
  • Which states offer ABLE accounts?
  • Are there any tax incentives for using an ABLE account?
  • How much can I contribute to an ABLE account?
  • What expenses can be paid from an ABLE account?
  • How much does it cost to open an ABLE account?
  • Should I consider a special needs trust instead?

Why should someone open an ABLE account?

“Living with a disability can be costly, hence the reasoning behind ABLE accounts,” says Matt Schechner, president and founder of financial planning firm Essential Advisory Services in Westbury, New York.

Persons with disabilities may incur medical expenses or additional costs related to transportation, education and housing. At the same time, they may receive income and benefits from government programs such as SSI and Medicaid. These programs generally limit a person’s assets to $2,000. Prior to 2014, this put people with disabilities in a situation where they could not save for future needs without jeopardizing current benefits.

“The ABLE account is how a person can have assets that they control, says Scott Butler, a retirement income planner at Klauenberg Retirement Solutions in Laurel, Maryland. Up to certain limits, money held in an ABLE account does not count against government program asset limits.

Who is eligible to open an ABLE account?

A person must be considered blind or disabled before the age of 26 to be a beneficiary of an ABLE account. Those receiving SSI or Social Security disability benefits are automatically eligible to open an account. Others must meet Social Security’s definition of a disability and receive a doctor’s letter to that effect in order to qualify, according to the ABLE National Resource Center.

Which states offer ABLE accounts?

Currently, 42 states and the District of Columbia offer ABLE accounts. However, even those who live in a state that does not offer ABLE accounts can open one through another state’s program. Currently, 26 states allow anyone to open an account while the rest limit their programs to state residents.

Are there any tax incentives for using an ABLE account?

To like 529 accounts for college savings, ABLE accounts are administered at the state level, and several offer tax incentives to residents.

For example, Michigan and Arkansas allow single filers to deduct $5,000 of ABLE account contributions on their state tax forms. For joint filers in both states, the maximum deduction is $10,000. Meanwhile, Illinois offers income tax deductions of $10,000 and $20,000 to single and joint filers, respectively, while Kansas limits its deductions to $3,000 for individuals and $6,000. $ for couples. Other states, including New York and California, offer no tax incentive for contributions.

These deductions are generally only available to residents who contribute to their own state’s ABLE program. While contributions to another state’s account don’t qualify for a deduction, Butler says people should consider whether other plans have lower fees and better investment options. “Sometimes it’s better to choose a different plan than to get that tax (deduction),” he says.

Whichever state you choose, withdrawals from an ABLE account are tax-free as long as the money is used for a qualifying expense related to the beneficiary’s disability.

How much can I contribute to an ABLE account?

An individual can contribute $15,000 to an ABLE account each year. Although anyone can make a contribution, be aware that only the first $100,000 of an account balance is protected against means testing for government programs. “If it’s over $100,000, it could affect your SSI benefits,” Butler says.

What expenses can be paid from an ABLE account?

Money from an ABLE account can be used for a wide range of products and services such as medical treatment, transportation, housing, education and assistive technology. The only requirement is that the expense be related to the person’s disability.

Withdrawals used for ineligible expenses may be subject to both ordinary income tax and a 10% tax penalty.

How much does it cost to open an ABLE account?

Fees vary by state, so it pays to compare costs. For example, Ohio charges an annual fee of $30 for its residents and an annual fee of $42 for non-residents. In New York, which does not allow enrollments by non-residents, the annual fee is $45, unless paper statements are selected. In this case, the annual fee is $55.

There may also be investment fees associated with an ABLE account, and these may depend on the funds you choose for your money. “ABLE accounts have account service fees, which keep ABLE accounts operational, and asset management fees, which compensate managers for choose stocks and portfolio management,” says Schechner. Investment fees may be deducted from the account balance rather than being paid directly by the account holder.

Each state’s plan offers different investment choices, so be sure to carefully review low-cost investment options to pick a plan you’re comfortable with.

Should I Consider a Special Needs Trust Instead?

Although ABLE accounts have the potential to help millions of Americans with disabilities, some people may still choose to set up a special needs trust, sometimes called an additional needs trust. These trusts cost more to set up but offer more flexibility in their use, Scudillo says. Additionally, they are usually the only option for those who did not become disabled until after age 26.

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