Modeled after 529 college savings accounts, ABLE will offer tax advantages for people with disabilities
Americans with disabilities and their families often face a myriad of financial challenges, but they will soon have a new financial vehicle allowing them to save for expenses and enjoy tax-free growth similar to 529 college savings accounts. Congress passed the Achieving a Better Life Experience Act on the final hour of the final day of Congress in December, creating a new type of tax-advantaged account called an ABLE account or a 529A.
The hope is that ABLE accounts will help level the financial playing field for families raising kids with disabilities. The National Down Syndrome Society estimates that the accounts will benefit roughly 5.8 million individuals and families.
"As a country, we've basically said that we value saving for higher education using a 529 plan, but we don't value saving for the basic needs that are connected to a disability," says Sen. Bob Casey, D-Pa., who sponsored the Senate version of the bill. "We have this bizarre and really insulting situation where a child with a disability, his or her family couldn't save for his or her future [in a tax-advantaged account], but they could save for his or her brother or sister because they were going to university."
Like 529 college savings accounts, ABLE accounts allow families to set aside money (up to $14,000 per person annually), and pay no taxes on that money's growth as long as it's used for qualified expenses. For a 529 college account, qualified educational expenses include college tuition, fees and textbooks.
The beneficiaries of an ABLE account may have more diverse needs, so those accounts allow for a broader list of qualified expenses, including special education services and tutoring, health care costs, assistive technology and housing. "[ABLE accounts] are tailored for different purposes because it covers the support, the housing, legal fees and even funeral and burial expenses," says Dave McKelvey, a tax and business consulting partner at New York accounting firm Friedman LLP.
Assets in both types of 529 accounts are generally protected in bankruptcy, as long as contributions were made at least two years before a bankruptcy (meaning relatives can't shield assets by transferring them to a 529 just before declaring bankruptcy). "If the parents declare bankruptcy, the money would still be there for the child," McKelvey says.
Similar to the college savings accounts they are modeled after, ABLE accounts will be offered by states – although the Department of the Treasury and IRS are also involved. Based on the strong bipartisan support the ABLE Act received, Casey predicts that states will start offering accounts later this year.
"The states are all individually, as we speak, putting together legislation for how ABLE accounts will be administered," says Peg Creonte, senior vice president of Ascensus College Savings, which helps states administer 529 college savings plans. "We're still really in a waiting mode.”
The original 529 accounts allow students to have multiple 529 accounts in their name (for instance, if grandparents opened one and parents opened another) and choose a plan from any state regardless of where they live. Those with an ABLE account must open an account with their home state, and they can only have one account in their name. To qualify, the beneficiary must have been blind or disabled before age 26 and meet other criteria for documenting a severe disability.
In the past, individuals with disabilities could not have more than $2,000 in assets to qualify for benefits like Medicaid and Supplemental Security Income. However, beneficiaries of ABLE accounts can save up to $100,000 in the plan without losing those benefits (once the account balance exceeds that threshold, it would impact SSI benefits).
McKevley says that with the annual contribution limits of $14,000 and an overall asset cap of $100,000, ABLE accounts will likely help middle- to upper middle-class parents who may not have the resources to fund a special needs trust during their lifetime.
Casey hopes that ABLE accounts will help give families of children with disabilities more peace of mind. "When that 7-year-old with Down's syndrome becomes a 25- or 30-year-old in the workforce, parents are always worried because they are used to being present and able to help their daughter in all kinds of ways," he says. "Now at least there’ll be an account that she can contribute to over time. It doesn't solve all problems, obviously, but it does give a measure of security to the individual and the family."