ABLE Account

An ABLE account is a tax-advantaged savings account available to individuals diagnosed with significant disabilities before age 26. Contributions can be made to the account by the beneficiary, friends or family members, but the total annual contribution must not exceed a certain limit, which is pegged to the gift tax exemption. In 2018, this limit is $15,000 – up from $14,000 in the previous year. 

The contributions themselves are not intended to be tax deductible, although some states may allow deductions against state income taxes. However, the funds within the account grow tax-free.

ABLE accounts were created by the 2014 ABLE Act, with ABLE being an abbreviation of Achieving a Better Life Experience. ABLE accounts are very similar to the educational 529 accounts and are also known as 529A accounts. 

ABLE accounts are a welcome tool for the individuals with significant disabilities and their friends and family. Parents of children with severe disabilities are naturally concerned about securing enough funds to offset the lifetime costs that come with living with a disability. The funds can be used to cover qualified disability expenses.

Prior to the ABLE act, many families had to turn to trusts as the main vehicle for attempting to provide for a disabled child. But ABLE accounts have two main advantages over a trust.

One, a trust require legal help – usually a trusts and estates lawyer – to set up, which results high fees. Two, trusts carry a tax liability that can impact the beneficiary negatively in terms of qualifying other funding programs if it is not set up correctly. This is why advice on setting up a special needs trust is also expensive – it gets complex.

A trust does have one main advantage: There is no upper limit to the contributions that can be made to it. An ABLE account, by contrast, has a state limit per plan. Many states set this limit at $300,000, with only the first $100,000 exempt from impacting eligibility for Supplemental Security Income (SSI).

For many families, however, the limits are not as much of a concern. The advantages of tax-free growth in a simplified account that doesn't impact other government benefits far outweigh the disadvantages. With Medicaid benefits, for example, people who possess assets above a certain amount  see their benefits disappear. ABLE accounts can avoid this problem. Even if a family has the type of wealth that requires a trust to handle excess contributions for their child, it still makes sense to max out an ABLE account yearly for the tax-free growth.