Planning for a child with disabilities involves unique financial challenges. Beyond meeting daily expenses, families often need to save for long-term goals while ensuring eligibility for essential government benefits like Supplemental Security Income (SSI) and Medicaid.
Achieving a Better Life Experience (ABLE) accounts provide a tax-free solution to help families save for disability-related expenses without jeopardizing these benefits.
Let’s explore ABLE accounts, their benefits, and how they can play a crucial role in securing your child’s future.
What is an ABLE account?
An ABLE account is a tax-advantaged savings account created under the ABLE Act of 2014. It allows individuals with disabilities and their families to save for disability-related expenses without affecting eligibility for means-tested government programs.
Key features of ABLE accounts include:
- Tax-free growth : Earnings on contributions grow tax-free, and withdrawals for qualified disability expenses (QDEs) are not taxed.
- Benefit preservation : Account balances below $100,000 are excluded from the SSI resource limit, and Medicaid eligibility is unaffected regardless of the account’s balance.
- Ownership and control : The account owner—typically the individual with a disability or their legal guardian—manages the account and decides how funds are spent.
To qualify, the disability must have occurred before the age of 26. Starting January 1, 2026, this age limit will increase to before age 46, expanding eligibility to a larger group of individuals.
What expenses can ABLE accounts cover?
ABLE accounts are designed to cover a broad range of disability-related expenses that improve or maintain the account owner’s quality of life.
These qualified disability expenses (QDEs) include:
- Education : Tuition, books, and other educational supplies.
- Housing : Rent, utilities, and modifications to make a home accessible.
- Transportation : Public transportation, vehicle purchases.
- Healthcare and wellness : Co-pays, therapies, medical devices, and assistive technology.
- Basic living expenses : Food, clothing, and personal care items.
- Employment support : Job coaching, training programs, or related services.
- Legal and financial services : Costs related to estate planning or financial advice.
Expenses must relate to the individual’s disability and contribute to their health, independence, or quality of life. Keeping proper documentation of expenses is critical to avoid penalties for non-qualified withdrawals.
Why are ABLE accounts important for preserving benefits?
Government programs like SSI and Medicaid provide crucial support for individuals with disabilities, but they have strict eligibility requirements.
For instance, SSI recipients cannot have more than $2,000 in includable assets.
ABLE accounts offer a way to bypass these restrictions. Funds are excluded from the SSI resource limit if the account balance remains below $100,000. If the balance exceeds $100,000, SSI payments may be suspended but will resume once the balance is reduced below this threshold.
Significantly, Medicaid eligibility is never affected by the balance of an ABLE account, ensuring continuous healthcare access.
This makes ABLE accounts an essential tool for preserving benefits while saving for future needs.
What are the contribution limits for ABLE accounts?
Contributions to ABLE accounts are subject to the following limits:
- Annual contribution limit : As of 2024, contributions are capped at $18,000 annually, aligning with the federal gift tax exclusion.
- Additional contributions for employed individuals : If the account owner is employed and does not participate in an employer-sponsored retirement plan, they may contribute additional earnings up to the federal poverty line of $14,580 for one person in 2023 (in 48 states plus the District of Columbia).
- Lifetime contribution limit : Total contributions cannot exceed the state’s maximum for 529 plans, typically ranging from $235,000 to $575,000.
Contributions can come from multiple sources, including family members, friends, or the account owner. This makes ABLE accounts a collaborative savings tool that can pool resources for the individual’s benefit.
How do ABLE accounts differ from other savings tools?
ABLE accounts and special needs trusts (SNTs) both help individuals with disabilities save money without jeopardizing benefits, but they serve different purposes:
- Tax advantages : ABLE accounts offer tax-free growth and withdrawals for qualified expenses, while SNTs are subject to income taxes.
- Ease of access : ABLE accounts are easier to set up and manage, requiring no legal assistance or trustees.
- Contribution limits : ABLE accounts have annual and lifetime contribution limits, whereas SNTs can hold unlimited amounts.
- Flexibility : Funds in ABLE accounts can be accessed and managed directly by the account owner, fostering independence.
Families often use ABLE accounts and SNTs together. For instance, an ABLE account can handle smaller, day-to-day expenses, while an SNT is better suited for managing large inheritances or legal settlements.
How to open and manage an ABLE account
Setting up an ABLE account is straightforward. Follow these steps:
- Research state programs : ABLE accounts are administered at the state level, and each state offers unique features. Compare fees, investment options, and additional benefits to find the program that best fits your needs.
- Verify eligibility : Ensure the individual meets the eligibility criteria, including proof of disability before age 26 (or before age 46 starting in 2026). Documentation such as a physician’s certification or SSI/SSDI determination may be required.
- Open the account : Most state programs offer an online application process, making it convenient to open an account.
- Fund the account : Contributions can be made via check, electronic transfer, or direct deposit. Many programs allow recurring deposits for easier management.
- Choose investments : ABLE programs typically offer various investment options, ranging from conservative savings accounts to more aggressive portfolios. Select one that aligns with your financial goals.
- Track expenses : Maintain records of withdrawals to ensure they meet the definition of qualified disability expenses and avoid penalties.
Common mistakes to avoid
To maximize the benefits of an ABLE account, avoid these pitfalls:
- Exceeding contribution limits : Contributions above the annual limit may result in penalties and administrative complications.
- Non-qualified withdrawals : Using funds for expenses that don’t qualify as QDEs may result in taxes, penalties, and a potential loss of benefits.
- Neglecting account reviews : Review your account’s performance and spending to ensure it aligns with your financial goals.
Final thoughts
ABLE accounts offer a powerful way to save for your child’s future in a tax-advantaged way without compromising access to critical government benefits.
Families can incorporate ABLE accounts into a comprehensive financial plan by understanding their features, contribution limits, and eligible expenses.
