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ABLE (Achieving Better Life Experience) accounts have been around since 2014, but if you are today years old when you are learning about them don’t be embarrassed. In ancient times, I had ten or so up and coming accountants whose careers I felt responsible for. I counseled them that clients expected them to have general financial literacy. Among other things, I suggested they read Forbes. And as I did a bit of digging I found that Forbes.com has already covered ABLE in 2019. You can check out 529 ABLE Accounts: Helping End Forced Poverty For Disabled Individuals by Robert Farrington. And yet I have known about ABLE accounts for less than a year.
The Need Served By ABLE Accounts
Over eight million people collect SSI. You may think that you don’t know any of them, but when people send out the Christmas letters about their kids graduating from medical school or becoming Rhodes Scholars, they sometimes forget to mention the one who is in rehab. My friend James tells me he sometimes hates his friends when they talk about their high achieving kids. Regardless, SSI and other benefits such as Medicaid are what created the movement to establish ABLE accounts.
To qualify for SSI you cannot have more than $2,000 in countable resources. To oversimplify let’s call that money in the bank. So someone on SSI cannot have a significant stash for emergencies or save up for a large purchase. ABLE accounts are not countable assets until they exceed $100,000.
One way that families deal with this issue is by establishing special needs trusts. I have not had luck in figuring out what the practical minimum amount for a special needs trust is. I have seen $100,000 suggested.
Many, probably most, disabled persons are perfectly capable of handling their own financial transactions, so having to deal with a trustee can be one more thing that compromises their agency. An ABLE account can be a useful adjunct to a special needs trust or probably much more commonly all that is required for more modest amounts of assets.
ABLE accounts are defined under Section 529A of the Internal Revenue Code. If that number rings a bell it is probably because of Section 529 qualified tuition programs. The accounts have some similarity. ABLE accounts are managed by state agencies. Most states now have them. In order to qualify to be the designated beneficiary of an account, they must be entitled to social security benefits on the basis of blindness or disability that arose before age 26 or have filed a disability certification that establishes that they have a medically determinable physical or mental impairment that arose before age 26.
A designated beneficiary can have only one account. Each year there can be aggregate contributions to the account up to the annual gift tax exclusion – $16,000 in 2022. In addition the beneficiary can contribute earnings if they do not participate in an employer sponsored retirement plan. The limit for that is tied to the poverty line – currently $12,880 in most states. The earnings contribution may earn a savers credit.
Earnings of the ABLE account are not taxed. Withdrawals are tax free if they are for “qualified disability expenses”, The definition of “qualified disability expenses” is very broad – expenses “which are made for the benefit of an eligible individual who is the designated beneficiary”. In the unlikely event that a non qualified distribution takes place the portion taxable is based on the proportion of accumulated earnings in the account. So early in the life of the account very little would be taxable. There is also a 10% penalty.
It is possible that for some people ABLE accounts will behave in a way similar to ROTHs. More commonly, I suspect, they will be like HSAs. For beneficiaries on Medicaid, there is concern about Medicaid payback in the event of their death. The rules on this vary from state to state and seem to be evolving. This probably should not be a significant concern for smaller accounts.
The most thorough convenient source for information about ABLE is the website of the ABLE National Resource Center, a collaborative managed by the National Disability Institute. A valuable feature is one that allows you to compare the programs of different of states. There can be incentives for using the program of your state, but you are not required to use your state’s program. Investment options vary from plan to plan with banks and mutual fund companies like Fidelity and Vanguard, There can be transaction fees that vary from account to account. Rollovers are permitted.
Should Be Better Known
As an advocate of tax simplification, I tend to think that ABLE accounts are not such great tax policy, but remember Reilly’s First Law of Tax Planning – It is what it is. Deal with it. ABLE accounts are a great tool and more people should know about them. My informal survey finding is that they are well known to disability advocates but among financial planners and general tax advisers not so much. I will be having a slightly more technical piece oriented to tax practitioners coming out in Think Outside The Tax Box soon.
Emma Patch has ABLE Accounts Give Disabled More Financial Freedom in Kiplinger.
Lisa Shidler has ABLE Accounts – What Can These Tax-Advantaged Savings Be Used For? in Money Crashers.
Erin Vallely has a piece critical of the New York program in particular How ABLE Accounts Fail Disabled People on the Center for Disability Rights website