Parents of children who became disabled before age 26 will soon be able to open and fund new, tax-sheltered savings accounts for them. I’ve spoken to several experts about these accounts and want to pass on their advice.
ABLE accounts, which are similar to 529 accounts for college, are the result of a little-known law passed in late 2014 known as The ABLE Act (ABLE stands for Achieving a Better Life Experience). In fact, they’re also known as 529A accounts.
How ABLE Accounts Will Work
Parents will be able to use money in an ABLE account — maximum total annual contribution per account: $14,000 — for disability-related expenses for education, medical and dental care, job training and transportation, among other things. Although contributions won’t be tax-deductible, the accounts will grow tax-free, withdrawals for qualified expenses will be tax-free and people contributing no more than $14,000 a year won’t owe gift taxes on their generosity. (The disabled children, other relatives and friends can fund ABLE accounts, too.)
Before ABLE accounts, a disabled person could only have personal liquid assets of $2,000 or less and still be able to receive Medicaid benefits.
“There are lots of things people with severe disabilities have to juggle in their lives, and one of the issues has been that there’s been no way for them to save for the future,” says Marty Ford, senior executive officer for public policy at The Arc, the largest national community-based organization for people with disabilities and their families. The National Disability Institute (NDI) estimates that roughly 5.8 million individuals and families will be able to establish ABLE accounts.
There are lots of things people with severe disabilities have to juggle, and one issue has been that there’s been no way to save for the future.
— Marty Ford, The Arc
States and the Internal Revenue Service are in the process of hammering out regulations for the accounts, which are expected to start becoming available in early 2016; so far, 31 states have approved legislation to allow ABLE accounts for their residents. (The National Down Syndrome Society site shows the progress of state-by-state implementation.)
Trusts Vs. ABLE Accounts
Until now, a Special Needs Trust was the primary method parents used to put money aside for their disabled children. But that generally meant paying an estate attorney to set one up. Also, “a trust can quickly get you to owe the highest tax rates; with an ABLE account, the tax liability is zero,” says Chris Krell, a principal with Cassady & Company who’s an expert on the new law.
One advantage Special Needs Trusts will have over ABLE accounts, however: There’s no limit on how much money you can put into them.
By contrast, if an ABLE account balance exceeds $100,000 and the disabled person was receiving Social Security Income benefits, those payments would be suspended.
“In many ways, the ABLE Act is a game-changer for families with children with special needs,” says Krell. “It allows them to have money set aside for the niceties of life without affecting Social Security or Medicaid benefits.”
Advisers I spoke with recommend funding an ABLE account to the max, if you can. Then, if you want to put aside more money for your disabled child, you might do it through a Special Needs Trust.
What’s Still Unknown
A few key elements of ABLE accounts are still unknown and won’t become clear until federal and state regulations are finalized.
One of them: the federal government’s definition of “disability-related expenses” for the accounts. Says Christopher Rodriguez, Senior Public Policy Adviser at the National Disability Institute: “There’s a wide variety of needs that varies from person to person. For that reason, we want to be sure the definition is broad.”
Another unknown: Whether parents will be allowed to open ABLE accounts run by states other than the ones their kids live in because other states have more appealing investment choices or lower fees or because the child’s state hasn’t approved the accounts. Today, parents can open 529 accounts offered by any state.
“I think the first accounts will require you to open them in the state of residence of the qualified beneficiary, unless the state has contracted out ABLE accounts to another state,” says Rodriguez.
There’s no federal limit on the maximum amount you can have in an ABLE account. But states will set their own ceilings and experts expect those to be around $300,000.
One wrinkle to keep in mind if you plan to open and fund an ABLE account: that $14,000 annual contribution limit is $14,000 from all contributors to the account, says Ford. In other words, if one parent puts in $14,000, the other parent can’t put in a dime that year and neither can a grandparent. And a disabled person can only have one ABLE account, Ford notes.