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ABLE Accounts for Loved Ones with Disabilities – February 12, 2020

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Living with a disability is often associated with significant amounts of extra costs. That’s why individuals and families can now contribute to ABLE accounts — tax-advantaged savings accounts that can fund disability expenses. The ABLE account can be beneficial for many reasons.

  • The ABLE account, also called a 529A savings account, is patterned after the popular 529 savings plan, created to help parents save for a child’s higher education. Like 529 plans, ABLE accounts are run by states rather than the federal government.
  • ABLE accounts address an underpublicized financial need. While some families open college savings accounts, comparatively few start discrete savings accounts or trusts for children with disabilities. That difference may be partly due to the presumption that “the money will be there” when the child becomes an adult.
  • ABLE accounts do not count toward the $2,000 limit on assets when applying for Medicaid. Even if funds in the account exceed $100,000, the account beneficiary will still be eligible for Medicaid (albeit, ineligible for SSI).
  • The current ABLE account maximum is $305,000 for NJ (maximums vary by state). Account contributions can be made by anyone.
  • ABLE account holders have some new options, thanks to federal tax reform. The Tax Cuts and Jobs Act of 2017 brought notable changes for these accounts. While the basic annual account contribution limit is currently $15,000 for an individual, working ABLE account holders may now contribute employment income to their accounts in excess of that $15,000 threshold, up to the individual federal poverty level set for the preceding calendar year.
  • You may now roll over up to $15,000 from a standard 529 plan into an ABLE account. One key condition must be met: the beneficiary of the standard 529 plan must either be the same person who is the beneficiary of the ABLE account or a member of the same family as the ABLE account holder.
  • ABLE accounts have tax-deferred earnings and tax-free withdrawals. Withdrawals go untaxed, so long as the money is spent on “qualified disability expenses,” which can range from education, housing, and transportation costs to job training and health care. Nonqualified withdrawals, naturally, are taxable.

ABLE accounts are becoming an important component of special needs planning. The word worth emphasizing here is “component.” The money in an ABLE account alone may not be enough to cover lifetime care expenses for a disabled adult, even if the account is replenished. An ABLE account is usually not a financial “answer” for families with mentally or physically challenged children, but a part of a greater financial strategy that might include a supplemental needs trust or other savings vehicles.

The biggest drawback of ABLE accounts is that they do nothing for people who become disabled after age 26. You cannot open one for someone older than 26, unless the individual became disabled prior to reaching that age. Another little-known demerit: states sponsoring ABLE accounts can seek repayment from those accounts for the cost of care covered by Medicaid if the beneficiary dies.

The bottom line? ABLE accounts give families with children who have special needs a new way to save and invest for future needs and expenses.

Please contact our office with any questions.  We are happy to help in any way we can.

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