ABLE: Achieving a Better Life Experience

Many parents of kids with disabilities will tell you that supporting and caring for them is one of the hardest yet most rewarding things they’ve had the privilege of doing. These families have many facets of their lives to manage, and money typically is the most substantial factor weighing them down. Fortunately for these families, recent changes to  ABLE accounts will better assist them financially.

ABLE accounts were created in 2014 under the Achieving a Better Life Experience (ABLE) Act. The primary objective for this account is to authorize a person with disabilities to establish a tax-exempt account to save for disability-related expenses without impacting eligibility for resource-based benefits. At their inception, little to no attention was directed towards the ABLE Accounts because of restrictions but due to the Tax Cuts and Jobs Act of 2017 (TCJA), they are more appealing than ever.

The Benefits of ABLE Accounts

ABLE accounts can be opened for individuals that are disabled before turning age 26. Friends, family, and owners of the account can contribute after-tax dollars into the account. Investment growth within an ABLE account isn’t taxed, resulting in a quicker increase in value. Distributions from ABLE plans, including accumulated earnings, are entirely tax-free to the designated beneficiary as long as they are used to pay qualifying expenses. Some of the qualified expenses are listed below:

• Daily living expenses
• Education
• Housing
• Transportation
• Costs associated with going to work
• Expenses related to keeping a job
• Health care
• Assistive technology
• Legal fees
• Financial management fees

One of the most significant advantages of an ABLE account is that the disabled individual and their families can build savings in this account, without losing eligibility for alternative critical benefits including state-operated benefits plans, Medicaid, and Social Security Benefits, which have asset ceilings of $2,000. Furthermore, some state plans like Medi-Cal and CalFresh will provide benefits no matter the amount saved in the ABLE Accounts. In addition, asset values within the ABLE account will not affect eligibility for medical assistance through Medicaid. Social Security Benefits are permitted for individuals with ABLE accounts with a balance lower than $100,000. It’s important to note anything above $100,000 in an ABLE account will result in the loss of Social Security Benefits.

As was mentioned earlier, the TCJA made many changes to the ABLE accounts that make them more attractive and more suitable to implement, and the hope is that these changes will result in increased numbers of ABLE accounts and/or higher balances. The changes are listed below:

• Contribution limits increased from $14,000 to $15,000 per year.
• Employed beneficiaries not actively participating in their employer-provided retirement plan can contribute 100% of their earned income to their ABLE account.
• ABLE account holders who work are eligible to contribute above $15,000 a year.
  • The limit is either the lesser of the Federal poverty limit ($12,060) or the individual’s overall compensation for the year.
• ABLE beneficiaries could claim the Saver’s Credit based on the allocation of the earned income directed into their ABLE account.
• ABLE account holders are permitted to roll over funds from a regular 529 College Savings plans to ABLE accounts tax-free up to $15,000 per year.
• Lastly, under the PATH Act of 2015, not TCJA, individuals can choose ABLE accounts outside of the state of residency.
  • This allows individuals to have more control over investment options, expenses, and even the state-based maximum account limits.
  • This link will provide you a brief insight into each state-sponsored ABLE account.

Maximizing ABLE Account Benefits

Let’s explore situations where ABLE accounts can benefit a household with a disabled person.

• ABLE accounts are much more affordable and easier to activate compared to its counterpart the Special Needs Trust. This is useful for families that do not have the means to create a Trust or simply a lower cost replacement for small trust.
• Qualified Tuition Programs 529 Plans allow an annual $15,000 to be rolled over to ABLE accounts.
  • This change helps families to reallocate initially funded 529 College Savings plans for their children before receiving a child’s diagnosis into an account better fit to pay for disability expenses.

There is a useful planning strategy that coordinates ABLE accounts with Special Needs Trust. In this scenario, a family would fund the ABLE account over several years, taking advantage of tax-free growth while simultaneously funding a Special Needs Trust. The ABLE account value should not exceed $100,000 in an effort to preserve the beneficiary’s public benefits. In this scenario, a rule of thumb is to have little to no assets in the ABLE account upon the death of the disabled individual because assets within the ABLE account are likely to be recovered by Medicaid at the beneficiary’s death whereas assets in the Special Needs Trust can be bequest to surviving family members. Therefore, the ABLE would be the first savings bucket to draw down.  Once the ABLE account has been exhausted, then the family or individual would utilize the assets within the Special Needs Trust. This strategy combines the benefits of tax savings and postmortem asset control.

Families affected by disabilities continually manage areas of complexity outside the norm. More times than not, disabilities surprise families and forever change the way they operate. Sure enough, money seems to follow with every obstacle that arises. With the proper use of an ABLE account and guidance from a financial planner, money can better serve the family’s needs rather than be a burden.