ABLE Accounts Give Disabled More Financial Freedom
More states are offering tax-friendly accounts that give people with disabilities the tools to build a financial future.
The ABLE Act of 2014—the acronym stands for Achieving a Better Life Experience—allowed people of any age who developed a qualifying disability before age 26 (or their parents, relatives or friends) to invest up to $15,000 per year in an account that they can tap tax-free. Now, four years later, 36 states and the District of Columbia offer ABLE plans, and more states are joining their ranks. Texas introduced its ABLE program in May, and plans in California and several other states are on the way soon.
One of the biggest advantages of an ABLE account is that people with disabilities can save money in their own name without risking their government benefits. In the past, if they held more than $2,000 in their name, they’d lose their Supplemental Security Income (which provides a monthly stipend) and Medicaid benefits (which provide health insurance) until they spent down the money. Now, they can save up to $100,000 in an ABLE account without affecting their SSI benefits, and ABLE balances of any size don’t affect Medicaid eligibility.
And under the new tax law, you can also roll over money from a 529 college-savings account to an ABLE, up to the maximum annual ABLE contribution limit minus any other contributions for the year. The rollover can help families who saved in a 529 before their child was diagnosed with a disability but now worry about what will happen if the child doesn’t end up going to college. They can still use the money in an ABLE account for college, but they can also use it for many additional expenses.
“It can be used for anything that will improve the health, independence or quality of life for the person with the disability,” says Kaellen Hessel, advocacy and outreach manager at the Oregon Savings Network, which administers the state’s ABLE plan.
An account with the Oregon ABLE program, launched in December 2016, has made a big difference for Ashlynn Rutherford of Milwaukie, Ore., who turned 18 in December and is about to graduate from high school. She experiences quadriplegic cerebral palsy and epilepsy and receives SSI benefits and help from other programs that impose a $2,000 asset limit. Her younger sister would get birthday and Christmas gifts and put them in a bank account, but Ashlynn couldn’t save her money. “Before I had the ABLE, if I had money for my birthday, I had to put it in my wallet,” she says.
“It has been teaching her money management and independence and life skills,” says her mother, Alisha Langford. “This allows her to save her own money, and it’s empowering.” Her ABLE account offers a prepaid card, and Langford can load money onto it so that Ashlynn can pay for things herself when she goes out, like her friends do. She can also save for larger expenses, such as a cell phone.
The benefits of ABLE accounts
You can open an ABLE account, which operates much like a 529 college-savings plan, with as little as a $25 or $50 investment. Plans usually offer a small variety of mutual funds in which money grows tax-deferred. And you can tap the funds tax-free for expenses that benefit the person with the disability. Ten states give residents a state tax deduction for contributing.
The tax breaks are appealing, but the bigger deal is that these accounts permit a person with disabilities to save money in their own name without jeopardizing their government benefits. “It’s historic because it changed the mindset that these folks couldn’t save money and provide for the future,” says Sara Hart Weir, president and CEO of the National Down Syndrome Society, which was instrumental in getting the law passed.
Annette Hammortree, a special-needs planner with Hammortree Financial Services in Rosemont and Crystal Lake, Ill., recently helped a family whose 26-year-old son with special needs had inherited $12,000. “If that money hits his bank account, he doesn’t get government benefits until he spends it down,” she says. Instead, they put it into the ABLE account so he could keep the money without it affecting his benefits.
Families of young children can save in an ABLE and build up the savings that can be used tax-free for current and future expenses, too.
“People who were high-functioning and had jobs couldn’t save their money,” says John Nadworny, director of special-needs planning with Shepherd Financial Planning, in Winchester, Mass. His son, James, now 27, was born with Down syndrome and works two days per week doing recycling and office cleaning at local businesses with the help of a support person. Now he can save the money he earns in his account with the Massachusetts ABLE plan. “In the past, we had to keep it in my name if it was over $2,000,” says Nadworny. “This gives somebody the opportunity to save and build self-worth.”
Families of young children can save in an ABLE and build up the savings that can be used tax-free for current and future expenses, too. Margie Crowe of Stafford, Va., is saving in the Virginia ABLEnow plan for her 9-year-old daughter, Lilly, who was diagnosed with autism and has other special needs. Crowe hopes to save enough money in the ABLE account to help pay for her to go to George Mason University’s Mason Life program for young adults with intellectual and developmental disabilities, which costs $20,500 per year for Virginia residents.
“Our goal is to eventually save up to $100,000 in the account,” says Crowe. Lilly also receives speech therapy and occupational therapy that is currently covered by insurance, but her mother plans to use the ABLE money if they ever have to pay more of those expenses themselves.
Opening an account
To qualify for an ABLE, the owner of the account must meet Social Security's definition of having “severe functional limitations” with an onset before age 26. IRS regulations don't require account owners to submit documentation to the plan showing that they are eligible, although some states' plans have stricter requirements. Hang on to supporting documents in case the IRS or Social Security Administration asks for them.
People who are already receiving benefits under Supplemental Security Income or Social Security Disability Insurance (and who started receiving those benefits before age 26) are automatically eligible to open an ABLE and don't need other documentation. People may also qualify if they have a written diagnosis from a doctor certifying that they became blind or disabled before age 26.
You can contribute up to $15,000 per beneficiary in 2018, and the money can come from a variety of sources—gifts from parents, grandparents or friends, earnings from work, an inheritance, or other savings.
The list of eligible expenses includes anything that will improve health, independence or quality of life. “I've seen people use it for therapy animals, therapy horseback riding, physical therapy, counseling, durable medical equipment, wheelchairs, adaptations in the house, assistance from aides and other expenses,” says Mary Morris, CEO of Virginia's ABLEnow plan. You don't need to get permission from the plan for the withdrawal; you just need to keep records.
How to choose a plan
First, see whether your state offers a tax break for your contributions, which likely will determine whether you should invest in your home state’s plan. Iowa, Maryland, Michigan, Missouri, Montana, Nebraska, Ohio, Oregon, South Carolina and Virginia currently offer a tax break. For example, Virginia residents can deduct up to $2,000 in contributions to the Virginia ABLEnow plan each year.
Some states, such as Ohio, charge their own residents lower fees. Almost all ABLEs are open to residents of any state (although a few states, such as Florida and Louisiana, are limited to their own residents). A disabled person can have only one ABLE account at a time, but you can roll over ABLE money from one plan to another if you decide you like another plan better or if your state starts to offer a tax break.
If your state doesn’t offer a tax deduction for contributions, compare the investing options, fees and perks of plans in other states. See www.ablenrc.org for details about each state’s plan. The website also has a tool that allows you to compare the features of up to three plans at a time.
Most plans offer a money market account or other short-term savings option and several mutual funds for longer-term savings. The fund portfolios are usually based on your investment risk tolerance. The Oregon ABLE, for example, offers an FDIC-insured cash option and three investing options—conservative, moderate and aggressive—consisting of portfolios of Vanguard index funds. Fidelity administers the Massachusetts ABLE and offers eight portfolios of Fidelity funds with varying risk. Fidelity brokerage customers can access their ABLE along with other accounts with the firm, making it easy to move money and monitor performance.
Some plans require you to keep a certain amount of money in the cash option before you can invest in mutual funds. The Virginia plan, for example, requires you to keep at least $2,000 in the deposit account before you can invest other money in any of three Vanguard LifeStrategy funds (growth, moderate growth and income) or a Fidelity money market fund.
Check out fees that can quickly erode accounts with small balances. The average investment fee runs 0.3% a year, says Paul Curley, director of savings research at Strategic Insight. On top of that, plans assess an annual administrative fee—usually a flat dollar amount—which now averages $50 per year. “The investment fees are reasonable, and over time we expect the annual account fees to go down, as they did for 529 plans,” says Curley.
You may be able to reduce an administrative fee by setting up automatic contributions or enrolling during certain sign-up periods, Curley says. In Virginia, you can avoid the $3.25 monthly administrative fee if you keep at least $10,000 in the interest-bearing account.
Find out about other perks. Many ABLE plans offer debit cards or prepaid cards. Some provide a gifting portal that makes it easy for other family members or friends to contribute, similar to 529 plans.
Do you need a special-needs trust?
Before ABLE accounts were created, parents often relied on a "special-needs trust" to care for a child after their death. An ABLE, though, doesn’t replace a special-needs trust because the accounts serve different purposes.
“They’re two totally different tools. An ABLE is a savings vehicle, and a special-needs trust is an estate plan,” says John Nadworny, director of special-needs planning with Shepherd Financial Planning, in Winchester, Mass.
The type of special-needs trust that families use for estate planning is called a third-party trust. That trust usually isn’t funded until the parents or other relatives die. The trust is the beneficiary of their life insurance or other assets in their estate, and it can hold the money for the child without affecting eligibility for government benefits. You can designate a trustee to invest the money and control how it is spent, and you can also add a corporate trustee to monitor the trust, says Evan Whittle, a CFP with Raymond James in St. Petersburg, Fla.
Annette Hammortree, a special-needs planner in Rosemont and Crystal Lake, Ill., set up a special-needs trust for her 26-year-old son, who will always need support. “When I’m alive, I’ll pay for what he needs,” she says. But she has life insurance with the special-needs trust as beneficiary, and other relatives plan to leave money to the trust, too.