529 ABLE Plans: Saving For Children With Disabilities

Over my lifetime I’ve had a lot of friends and co-workers that have children with minor to severe disabilities. Some have mild cases of while others require 24-hour care. 529 ABLE plans are a new way to save for family members with disabilities in a tax-free savings account for both short and long term needs.

529 ABLE (Achieving a Better Life Experience) or 529A accounts are tax-advantaged savings accounts for individuals with disabilities and their families. Congress enacted the bill in 2014. States are starting to roll out the plans and make them available for those in need.

Modeled after 529 College Savings Plans, 529 ABLE accounts are for the parents of people with disabilities to save for their children’s needs in the future.

How do 529 ABLE accounts work?

Contributions are not tax deductible and are made with after-tax dollars (after taxes are taken out of the income of the contributor). Some states may allow state income tax deductions for contributions to an ABLE account.

Contributions grow tax-free.  For qualifying expenses withdrawals are tax-free.

Who can be the beneficiary of an ABLE account?

To qualify, an individual must have been blind or diagnosed with a disability before age 26. Also:

If the individual meets the age criteria and is already receiving Supplemental Security Income(SSI) or Social Security Disability Insurance (SSDI), they are automatically eligible for an ABLE account.

If an individual isn’t receiving SSI or SSDI they may still be eligible to set up an ABLE account if:

  • they meet the significant functional limitation definition under Social Security and
  • get a letter of certification from a qualified physician.

Who can contribute to ABLE accounts?

Anyone can contribute to an individual’s ABLE account. The contributions are limited by the annual gift tax exclusion for individual taxpayers (currently $14,000 per year).

What qualified expenses can you pay for with an ABLE account?

Qualified expenses include anything costs related to the beneficiary’s disability.

These expenses include (among other things):

  • education
  • housing
  • transportation
  • employment training and support
  • assistive technology and personal support services
  • health, prevention, and wellness
  • financial management and administrative services
  • legal fees
  • expenses for oversight and monitoring
  • funeral and burial expenses

What happens if I use an ABLE account for non-qualified expenses?

The beneficiary may be liable to pay for the following if money is withdrawn for non-qualified expenses:

  • Income taxes on the portion of the withdrawals that came from investment earnings (not the principal or contributions)
  • A 10% tax penalty

What do I need to provide to sign up for an ABLE account?

Designated beneficiaries can open an ABLE account by certifying, under penalties of perjury they have a signed physician’s diagnosis and will provide it to the program or the IRS upon request.

Eligible individuals with disabilities will not need to provide the written diagnosis when opening the ABLE account.

How much can I contribute to an ABLE account?

The maximum annual contribution is the same amount as the yearly gift tax exclusion permitted by the IRS – $14,000.

What are the investment options in ABLE accounts?

It will be up to each state to determine the available options and investment strategies.

The yearly plan expenses are one thing to pay attention to.  They can vary wildly by state.

Do my ABLE account savings affect my eligibility for federal disability benefits?

A key feature of ABLE accounts is that the first $100,000 in an account will not affect Medicaid and Supplemental Security Income (SSI) benefits.

This is important because in the past Federal regulations would prevent individuals from receiving aid and benefits if they had more than $2,000 in assets. Parents who planned ahead to provide for their children (upon the parent’s death) were punished by the $2,000 limit.

How many ABLE accounts can I own?

Federal regulations permit one ABLE account per person. Once an ABLE account has been set up for a beneficiary, no other ABLE account for the same beneficiary can be established.

This is in contrast to 529 College Savings Plans where a person might have multiple accounts.

Do I have to contribute to my state of residence’s ABLE account?

No. You can open an ABLE account in any state. The Consolidated Appropriations Act of 2016 removed the requirement that ABLE accounts be established in the account owner’s state of residence.

While the federal tax code allows for ABLE accounts, each state is responsible for setting up and administering the accounts. When you contribute money to an account, the state invests the money on your behalf.

Note that because 529 ABLE accounts are still relatively new, they are not yet available in all states.

However, be sure to check if there are tax advantages to opening an ABLE account in your home state. For example, you might be able to get a state income tax credit up to a certain percent or dollar amount if you contribute to the ABLE plan in your home state.

Take advantage of the plans if you can.

For more information see: