As one of the newest financial products to hit the market, ABLE accounts are a 529 account with all kinds of bells and whistles specially designed for disabled Americans.
After years of lobbying at the grassroots community of the disabled, ABLE accounts were incorporated into legislation in December 2014.
Why open an ABLE account?
The 529 accounts are traditionally state sponsored and used to save for your child’s college education. Although you won’t be able to deduct your contribution, the money will grow without taxation and will not be taxed when deducted for approved study expenses, especially tuition fees.
If you are that Parent of a disabled child, their future in higher education may be unclear. However, an ABLE account can save or invest money on a potential university experience, but the funds can be used for a variety of other life expenses.
Aside from saving for college, there are several reasons why both disabled people and parents of disabled children might want to open an ABLE account.
Asset Tests: Additional Security Income and Beyond
If you are disabled, state and federal assistance programs can make it difficult to gain financial independence. For example, to gain access to additional collateral income, you are generally only allowed to have assets of $ 2,000. The SSI resource limit is $ 3,000 for couples. Assets can include the value of your bank account, second vehicle, life insurance, cash and more.
Benefit programs aimed at those who meet the income requirement, which is usually low income, are known as “means-tested”. The qualification depends on the means of the applicant. These types of programs make it nearly impossible for individuals and families to save money as they can be disqualified if the savings reach a certain level. Disabled people living near or below the poverty line are particularly concerned with wealth limits as they are more likely to need additional savings for more frequent medical emergencies.
Other income-based public benefits
SSI is not the only means tested public benefit program. Many states may have a limit on assets associated with access to medical aid or Medicare if you are disabled. There are various other benefits that you may need to access that come with asset testing as well.
ABLE accounts solve this problem in many programs. The first $ 100,000 saved in an ABLE account doesn’t count towards SSI benefits. Any amount saved in an ABLE account cannot be counted towards wealth tests for almost all other federal need-based benefits – such as Medicaid.
ABLE accounts can act as tax-privileged savings accounts or as an investment vehicle. The interest earned on your ABLE account is not taxable for federal income tax purposes. Also, depending on your state of residence and the state that issued your ABLE account, you may not have to pay state taxes on the interest.
Search for tax parity
In some states, you can avoid the state tax burden on ABLE accounts even when you shop with ABLE programs outside of the state.
“Pennsylvania provides residents with ‘tax parity’ that allows them to purchase an ABLE plan across state lines while enjoying the tax benefits of the state of Pennsylvania,” said Paul Curley, director of 529 & ABLE Research at ISS Market Intelligence.
He says you should review your state’s laws to review possible state tax benefits associated with ABLE programs, including tax parity.
It’s important to note that all of these tax savings have one caveat to both state and federal income tax: they only apply when you’re withdrawing funds for qualified disability expenses.
What are Qualified Disability Expenses?
With a traditional 529 account, interest is not taxable as long as you use your withdrawals for qualified higher education-related expenses – or, in rare cases, K-12 education.
ABLE accounts are different. While you can use the money saved in this account towards higher education, the list of qualified disability expenses is much more robust. Almost anything related to the life of the disabled person is considered a Qualified Disability Issue with an ABLE Account, including, but not limited to:
- living costs
- Employment training and support
- Assistive technology
- Personal care services
- Health expenditure
- Prevention and wellness
- Financial management services
- Administrative services
- Legal fees
- Funeral expenses
- Other basic cost of living
Who can open an ABLE account?
You are currently entitled to open your own ABLE account if you have a disability certificate from the social security authorities and were under 26 years of age at the time of commencement. You can also open an ABLE account on behalf of your disabled child if they meet these requirements.
The Eligible Person does not need to be in receipt of Additional Security Income (SSI) or other benefits to qualify.
Legislative efforts to expand eligibility
The age requirement for ABLE accounts is problematic as many disabilities do not appear until later in life. In addition, 25% of American adults are disabled between the ages of 20 and traditional retirement age. Because of these facts, legislative efforts up to old age are in the works.
The standard annual contribution limit for an ABLE account is $ 15,000. Everyone can contribute to this maximum – the disabled person, family members, friends, etc.
Able to work
By 2025, working disabled adults are allowed to nearly double their contributions to ABLE accounts under the ABLE to Work Act.
Any income from your job can be set aside in an ABLE account up to the state poverty line as per the Internal Revenue Service. In 2021, that is, in addition to the standard contribution limit of $ 15,000, eligible individual residents of the 48 contiguous states could contribute an additional $ 12,880 from their labor income. That makes the maximum total annual dues for most states of $ 27,880.
“As ABLE to Work is slated to expire in 2025, a number of proponents and stakeholders are focused on expanding the ABLE to Work offering,” says Curley.
Avoid Medicaid Payback
If the beneficiary dies, any funds remaining in an ABLE account can be used for funeral expenses. In many states, any remaining balance in the beneficiary’s ABLE account, after taking funeral expenses into account, is paid out to the state to reimburse Medicaid.
Compare at the ABLE National Resource Center
To date, over 40 states have their own ABLE programs, and you can buy plans across state lines.
When deciding which ABLE accounts are best for you and your child, consider any state tax benefits, state-level Medicaid repayment rules that require reimbursement of some post-death payments, and fees.
“Most plans have annual or monthly maintenance fees as well as investment-related fees,” said Curley. “Be that yourself total Fees taking into account both categories. “
If you want to easily compare tariffs and save on fees across state lines, you can use a resource like the a ABLE National Resource Center.
Pittsburgh-based author Brynne Conroy is the founder of the Femme Frugality blog and author of The Feminist Financial Handbook. She writes regularly for The Penny Hoarder.
This article originally appeared on www.thepennyhoarder.com