By Ashley A. Jolissaint, Legal Assistance Attorney, Fort Meade JAG
The Advantages of an ABLE Account - Commentary
One of the challenges for parents of disabled children is how to plan for their financial future. If the child will be enrolled in Supplemental Security Income (SSI), there are severe restrictions regarding their ability to having savings and receive support for others.
Recognizing the significant costs of living with a disability, the Stephen Beck Jr. Achieving a Better Life Experience Act (ABLE) of 2014, provides a legal avenue for families to help disabled family members without affecting the disabled individual’s eligibility for public benefits such as SSI, Medicaid, and other means-tested programs such as FAFSA, HUD, and SNAP/food stamp benefits.
An ABLE account is a tax advantaged, FDIC insured, savings account available to certain, disabled individuals diagnosed with significant disabilities before the age of 26. Similar to a 529 education account, an ABLE account beneficiary is the account owner. The benefits and specific rules for ABLE accounts vary by state.
Using after tax dollars and regardless of the beneficiary’s age, contributions to an ABLE account may be made by friends, family, Special Needs Trusts, and even the designated beneficiary. Though contributions are not intended to be tax deductible, some states allow income tax deductions. For Maryland taxpayers, individual contributions of $2,500 ($5,000 for joint filers) per ABLE account are deductible when computing taxable income on the Maryland state tax return. Additionally, excess contributions may be carried forward for ten years.
Funds from an ABLE account can help designated beneficiaries pay for qualified disability expenses, and ABLE account growths and distributions are tax-free if used for qualified disability expenses, including education; housing; transportation; employment training and support; assistive technology and related services; personal support services; health, financial management and administrative services; legal fees; expenses for ABLE account oversight and monitoring; funerals and burials; and basic living expenses.
In 2020 and 2021, the total annual contribution by all participating individuals for a single tax year is the gift tax exemption of $15,000. The total limit over time that can be made to an ABLE account is subject to each state’s limits for education-related 529 savings accounts. In Maryland, the state account limit is $500,000 with an annual contribution limit of $15,000.
In addition to the annual limit of $15,000, an employed designated beneficiary who does not participate in an employer sponsored retirement account may make additional contributions to their ABLE account. However, a working designated beneficiary’s additional contributions are limited to the lesser of his or her compensation or the poverty-line amount for a one-person household. For 2020, this amount is $12,490 in Maryland. Thus, in Maryland, an employed designated beneficiary may personally contribute up to $12,490 to an ABLE account in addition to contributions totaling $15,000 made by the designated beneficiary’s friends and family.
While an ABLE account may reach the state limit over time, the ABLE Act creates additional advantages for disabled individuals who are recipients of SSI. Notably, the first $100,000 in ABLE accounts is exempted from the SSI $2,000 individual resource limit. If the ABLE account balance exceeds $100,000, the beneficiary’s SSI cash benefit is suspended until the designated beneficiary’s resources fall below $100,000. Further, when a beneficiary’s resources no longer exceed $100,000, their SSI benefits are reinstated without time limit. Note, however, this special rule only applies if non-ABLE assets or savings do not exceed the $2,000 resource limit. Finally, even if a beneficiary’s eligibility for the SSI cash benefit is suspended, the beneficiary will remain eligible for Medicaid benefits.
Additionally, the Tax Cuts and Jobs Act of 2017 allows an ABLE account’s designated beneficiary to claim the saver's credit for contributions and allows rollovers in limited amounts from a 529 qualified tuition program account of the designated beneficiary to the ABLE account of the designated beneficiary or his or her family member.
While Special Needs Trusts (SNT) have no contribution limits, creating a special needs trusts often requires specialized legal assistance. Additionally, compared to SNTs, ABLE accounts provide more choice and control for a beneficiary and their family, particularly if their individual circumstances change. The cost to open an ABLE account is also typically less than those costs associated with establish an SNT. Also, an ABLE account can complement and supplement an SNT.