Over the years, I have developed a network of other fiduciary financial planners. From time to time, I invite one of these individuals to contribute an article of interest. Today, Lauren Zangardi Haynes, CFP, CIMA of Evolution Advisers shares her thoughts about “Save with Able”. Lauren is a financial advisor in Richmond, VA.
Parents of children with a disability are used to fighting on behalf of their children. They want their children to have a comfortable and dignified life. Having a significant disability can be extremely expensive (lost work, medical bills, requiring extensive modifications for cars and homes, etc.). Yet, if an individual with a disability owns more than $2,000 in assets they could be disqualified from receiving Medicaid. Going without Medicaid is simply not an option for many people with disabilities. While you may have heard of Special Needs Trusts and they remain a powerful tool for protecting a disabled individual’s Social Security and Medicaid eligibility. However, there is a relatively new tool available to individuals with disabilities called ABLE accounts.
What Is an ABLE Account?
ABLE accounts were established by Congress in 2014 when they passed the Stephen Beck Jr. Achieving a Better Life Experience (ABLE) Act of 2014. Although the law was passed in 2014, it took some time for states to design and launch this new program. ABLE accounts were created in recognition of the fact that there are often significant expenses incurred in caring for a loved one with a disability. According to the ABLE National Resource Center, they were designed to “supplement, but not supplant, benefits provided through private insurance, Medicaid, SSI, the beneficiary’s employment and other sources.”
Who Can Use an ABLE Account?
An ABLE account can be opened for any individual who has a significant disability that had an onset before age 26. This includes individuals who were diagnosed with a disabling condition, even if they didn’t actually experience a significant disability due to that condition until later in life. The state of Illinois recommends you “have a record of the doctor’s signed diagnosis, a benefits verification letter from the Social Security Administration or other relevant documentation for account verification, as needed.” The list of qualifying conditions is quite long, the state of Virginia offers some additional details to residents that may be helpful. You can access that information here.
How does an ABLE account work?
An account beneficiary may only have one account and the total amount that can be contributed to that account by family and friends is $14,000 per tax year. Under Federal law, money inside an ABLE account can grow tax-free and be withdrawn tax-free for qualified expenses. What is a qualified expense? According to the ABLE National Resource center a qualified expense is any expense related to the beneficiary’s disability. “These may include education, housing, transportation, employment training and support, assistive technology, personal support services, health care expenses, financial management and administrative services and other expenses which help improve health, independence, and/or quality of life.”
Best practice: Save your receipts for purchases made with money from an ABLE account.
Not all states offer ABLE accounts. However, most states have passed a law authorizing the creation of such a program. The good news is, in 2015 Congress amended the law so that a resident of any state could open an ABLE account in any other state as long as that state accepted nationwide participants. So far the following states have launched ABLE accounts (states with residency requirements are noted in parentheses):
Florida (Florida Residents Only)
Kentucky (Kentucky Residents Only)
Missouri (Missouri Residents Only)
Oregon (A national program and an Oregon Residents Only program)
Vermont (Vermont Residents Only)
If you do not see your state on this list you can review this page by ARC to see where your state stands with regards to launching an ABLE program. As you can see, many states offer plans to U.S. residents nationwide. You can use this tool created by the ABLE National Resource Center to see how your state’s plan compares with other plans across the country. After you decide which state’s ABLE program you would like to use you can reach out to that particular program to open an account.
Tax Treatment of ABLE Accounts
There is no federal income tax deduction for contributing to an ABLE account. However, some states do provide a state income tax deduction. Typically this state income tax deduction is available to state residents who contribute to their home state program. Currently, Illinois does not offer a state tax deduction for contributions to an ABLE account. If you would like to see if your state offers a state income tax deduction use the State Compare tool by the ABLE National Resource Center.
(Currently, Virginia offers a $2,000 state income tax deduction for Virginia residents who contribute to an ABLE account. Check with your CPA or tax preparer to see if your contribution qualifies you for this Virginia state income tax deduction).
Risks to Be Aware of
ABLE accounts do typically allow an individual to invest in the stock and bond markets. As you have probably heard from any number of investment commercials, investing involves risk. These are not guaranteed products. In most cases individuals will need to decide on an asset allocation and/or select investments.
Get a primer on different types investments (written in plain English) here: What Is an Asset and How Can I Get One?
Investments are not FDIC insured unless they are in an FDIC insured savings account. Many ABLE account providers offer a checking account feature. Be sure you fully understand what is FDIC insured and what is not when selecting investments within an ABLE account.
As always, beneficiaries and their families need to be aware of the fees that are charged on these accounts. While many of these investment options are fairly low cost, don’t assume that a plan is low cost simply because it is being run by the state.
One other item to keep in mind is that if your account balance goes over $100,000 the beneficiary’s Social Security Disability benefits will be suspended until the account balance goes below $100,000 but their Medicaid benefits will not be affected. The total limit allowed in the account is being decided by each state individually but generally they line up with the state’s 529 account limit.
The ABLE National Resource Center also points out that states may try to claw back balances at the beneficiary’s death to repay benefits paid by the state’s Medicaid program on their behalf. This is known as the “Medicaid Pay-Back Provision.” I would encourage you to reach out to your state’s ABLE account administrator to find out what rules might be in place in your state of residence.
ABLE accounts are a powerful new tool available to families with loved ones with disabilities. They allow beneficiaries to pay for some of the significant costs associated with living with a disability in a tax-preferred manner. Family and friends can contribute to an ABLE account on behalf of a beneficiary without having to undergo the time and expense of funding a Special Needs Trust. Reach out to a Fee Only financial planner if you have questions about the benefits and risks involved in using an ABLE account.
About the Author
Lauren Zangardi Haynes, CFP(R), CIMA is a Fee Only financial planner and blogger in Richmond, VA. She writes on personal finance for families at www.wordsonwealth.com. You can read more about her background here.