ABLE accounts offer some people with disabilities a way to save for qualified expenses without compromising their eligibility for certain means-tested federal benefits. Here are 10 things to know about this type of account. Please consult you financial professional for specific advice.
1. ABLE accounts are designed for people with disabilities.
ABLE accounts are tax-favored savings accounts that make it possible for some people with disabilities to save money for their disability-related expenses without losing their eligibility for certain federal benefit programs.
For example, assets in an ABLE account do not affect Medicaid eligibility. And the first $100,000 of assets in an ABLE account does not affect eligibility for Supplementary Security Income (SSI) benefits. However, assets above $100,00 count as a resource for SSI purposes and can cause SSI benefits to be suspended if the resource limits is exceeded.
2. Nearly every state has an ABLE account program.
ABLE accounts are a relatively new type of account, offered by states as a results of the Achieving a Better Life Experience (ABLE) Act of 2014. Since the passage of the Act, nearly every state has created its own ABLE account program. Although some programs are limited to state residents only, many programs allow accounts to be opened by residents of any state. This means that you have the freedom to choose your state’s ABLE program or any program that accepts out-of-state residents.
3. Some states allow residents to deduct contributions.
Although the money you contribute to an ABLE account is not deductible for federal tax purposes, some states allow their residents to take a state income tax deduction for contributions they make to an ABLE account in their home state’s ABLE program to see if it offers any tax benefits.
4. Not all people with disabilities are eligible to open an ABLE account.
An ABLE account can only be open by, of for, someone whos disability or blindness occurred before age 26. Additionally, the person must be receiving SSI or Social Security Disability Insurance (SSDI) benefits or certify that he or she meets certain other requirements.
The person with the disability is the owner and designated beneficiary of the account. Anyone can contribute to it.
5. ABLE accounts offer the potential for tax-free earnings.
Investment earnings are not taxed while in an ABLE account and can be withdrawn free from federal tax if used for qualified disability expenses. Income tax and a 10% federal tax penalty will generally apply to the earnings portion of withdrawals that are not used for qualified expenses.
6. Many expenses qualify for tax-free withdrawals.
To be a qualified disability expense, the expense must be related to the account owner’s disability or blindness. According to the IRS, qualified disability expenses include amounts spent on education, housing, transportation, employment training and support, assistive technology, personal support services, health, prevention and wellness, financial management, administrative services, legal fees, expenses for oversight and monitoring, and funeral and burial expenses.
7. Up to $16,000 can be contributed in 2022.
The total of all contributions made to an ABLE account during the year generally cannot exceed the annual gift exclusion amount for the year, which is $16,000 for 2022.
8. Workers may be able to contribute an additional amount.
ABLE account owners who work may be eligible to contribute an additional amount, known as an ABLE to Work contribution, if they or their employer does not contribute to certain retirement plans that year. The maximum ABLE to Work contribution is the lesser of the account owner’s annual compensation of the federal poverty line, which for 2022 purposes is $12,880 for residents of the continental U.S., $16,090 for residents of Alaska, and $14,820 for residents of Hawaii.
9. State programs have their own cumulative limits.
States with ABLE programs set their own cumulative limits on account balances. These limits currently range from roughly $250,000 to $500,000. If your account balance reaches your program’s limit, additional contributions cannot be made until the balance drops below the limit.
10. Leftover savings may be claimed to reimburse Medicaid.
After the account owner’s death, savings remaining in an ABLE account after all outstanding qualified disability expenses have been paid may be claimed by the account owner’s state as repayment for the Medicaid assistance it provided during the time the account was open.
*This article reflects the federal tax laws in place on December 15, 2021.
Article published in March/April 2022 edition of Eye on Money. If you would like to be added to our mail list please email [email protected].
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