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Planning for the future of your disabled child: The ABLE account

Planning for the future of your disabled child: The ABLE account

Living with a disability can result in various expenses or a limited income if the disability affects your ability to work.  Since December of 2014, the Achieving a Better Life Experience Act has been working to help support programs for the disabled, such as the ABLE account. This Act was passed based on the argument that the 529 savings plan for students provides benefits to students for savings and future planning, but that parents of disabled children have no similar method and benefits for planning their children’s future. At Bullard & Associates of Bowie, Maryland, we can help advise you about your ABLE account and how it will affect your taxes.

            In order to open an ABLE account, you must be an “eligible individual”, who is the designated beneficiary and owner of the account.  In order to be considered an eligible individual, you must be entitled to Social Security benefits based on blindness or disability which occurred before the age of 26.  If the individual cannot collect social security, the eligible individual may file a signed statement by a physician stating that the individual has a physical or mental impairment which causes limitations functionally, and will either result in death or has lasted for at least twelve months.  An individual can only be listed as the beneficiary to one ABLE account.

            States are able to choose whether or not they wish to participate in the federal program by establishing their own ABLE state program.  Although they can create their own guidelines, the state must follow the federal guidelines first.  These include:

  • An annual limit on non-deductible cash contributions.  This includes contributions from all contributors to the account.
  • Only one account is allowed per eligible individual
  • Accounting for each individual’s account must be separate
  • An individual can only make investment changes twice per year. 

What makes the ABLE account a beneficial decision for the account holder is that the account is exempt from tax.  Because of this, contributions are not tax deductible, but any account growth is also tax-free, and if the contributions and earnings are distributed for qualified expenses, the distributions are not taxable.

Qualified expenses are any expenses related to the living of life with a disability made for the eligible individual.  Expenses include education, housing, transportation, technology which assists the individual with their disability, training and support, health care expenses, administrative services, and financial management.  In short, expenses which improve the individual’s quality of life.

The ABLE account is based off the idea of a 529 student account.  There are many benefits to a 529 plan.  Earnings through a 529 plan are tax-free, and also not taxed as income when the money is taken out for college.  This is essentially unparalleled by other types of accounts in relation to taxes. Usually, even savings accounts are subject to a capital gains tax.  The main difference between a 529 student plan and an ABLE account are the qualifying expenses.  The ABLE account is used for expenses related to improving the quality of life for disabled individuals (see examples above).  If the distributions from an ABLE account are used for non-qualifying expenses, the earnings which can be associated with the non-qualified expenses will be subject to tax, plus a penalty. 

Another major benefit that the ABLE account holds for individuals with a disability is its loose restrictions related to Social Security and Medicaid.  Being a participant in the Medicaid or Social Security government programs comes with guidelines and restrictions, one of the biggest of these being income.  To participate, the taxpayer’s income and assets cannot exceed a certain amount, and family support could decrease SSDI benefits.  The ABLE account allows disabled individuals to accumulate up to $100,000.00 in savings assets and still collect social security benefits.  For Medicaid, the individual can collect up to their resident state’s 529 account threshold and still keep their Medicaid benefits.  In Maryland, this amount is $350,000.00.

Despite a mostly positive outcome for disabled individuals, the ABLE account is not without its downfalls.  The major drawback of an ABLE account, especially for those with a life-threatening disability, is that all amounts which remain in the ABLE account after an eligible individual dies are distributed to the state in equal amounts to the medical assistance paid for the individual.  If there is money left over after the state has been paid back for Medicaid, the remaining amount will be distributed to the beneficiaries.  However, the ABLE account is able to be used for funeral expenses, prior to the Medicaid payback. 

 The set-up of an ABLE account is handled through the state.  When you contribute money to the plan, your state will invest the money for you.  The account will be held in the name of the eligible individual, and you can contribute up to $14,000.00 per year to the account.  The eligible individual does not need to make the contribution, so this is a great way for parents to save for their disabled children’s future needs.

            For parents with disabled children, starting an ABLE account as soon as one becomes available in your state is a great way to save for your child’s future.  It enables them to have some financial independence and eliminates worry that sudden expenses may be unplanned for and therefore unable to be covered in a timely manner.  If you live in the state of Maryland, and have questions about starting an ABLE account, contact Bullard & Associates in Bowie, Maryland, by clicking the link below. 

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