How Does an ABLE Account Work?
- Jun 7, 2023
An ABLE account may be a good choice if you want to support a disabled relative. Providing for a disabled relative as part of an estate plan can be tricky. This is because the goal is typically to provide for a relative without causing them to lose the right to receive means-tested government programs like Medicaid or Supplemental Security Income (“SSI”).
A Section 529A account, better known as an ABLE account, made possible by the Achieving a Better Life Experience (“ABLE”) Act, may be a solution. This is because it will typically not impact the beneficiary’s eligibility for Medicaid and SSI.
How Does an ABLE Account Work?
Under Internal Revenue Code Sec. 529A, funds in an ABLE account grow tax-deferred and distributions paid for qualified disability expenses are not subject to income tax. Not every state currently allows residents to set up ABLE accounts. However, in several states you are permitted to open an ABLE account as a nonresident if you reside in one of the few states that prohibit ABLE accounts.
It’s important to note that an ABLE account can only be used to benefit an individual who meets the following requirements:
- Disabled before the age of 26 (the age is increased to 46 for tax years beginning after 2025); and
- Entitled to benefits based on blindness or disability under the Social Security Act.
As a result, not all disabled individuals qualify. The individual with the disability is the owner and beneficiary of the account and can also be the administrator. If the beneficiary is under age 18 or unable to serve, then the administrator is an authorized legal representative, who could be a parent.
How Are ABLE Accounts Funded and Invested?
An ABLE account is invested using strategies approved by the applicable state, and only one ABLE account can be opened for a qualifying person. Investment modifications are permitted only twice a year. The account can typically be funded with annual contributions made by the account owner and their loved ones. As of 2023, annual contributions are restricted to $17,000. This amount is equivalent to the federal gift tax exclusion and is indexed for inflation.
A contribution to an ABLE account is considered a gift to the beneficiary for gift and generation-skipping transfer tax (“GST”) purposes and qualifies for the annual gift tax exclusion for both gift and GST purposes. However, contributions are not tax-deductible.
Account owners who work and who do not take advantage of employer-sponsored retirement plans may be able to make contributions that are higher than the annual ABLE contribution cap described above.
However, the ABLE account value can’t exceed the state’s cap on Qualified Tuition Plans.
Amounts in an ABLE account may be rolled over to another account for the same beneficiary or another disabled beneficiary in the same family. Until December 31, 2025, amounts from a Sec. 529 qualified tuition program may be rolled into an ABLE account subject to the annual contribution limitation.
Distributions from an ABLE account are tax-free if they are used to cover qualified eligible expenses. The focus of the qualified expenses must preserve or improve upon the beneficiary’s independence and quality of life and can include but are not limited to shelter, food, education and healthcare. Distributions attributable to profits, however, are subject to income tax plus a 10% penalty tax if withdrawals are made for nonqualified expenses.
Regulations for Continuing Benefits
One of the most significant benefits of ABLE accounts is the potential to qualify for or continue receiving government aid.
Regardless of the amount of savings in an ABLE account, Medicaid benefits are unaffected. However, any cash in an ABLE account that exceeds $100,000 will count against the person's resource cap and will result in a reduction or suspension of SSI benefits. Some states have Medicaid payback at the death of the beneficiary.
It is important to keep the documentation of qualified eligible expense distributions.
Guidelines for Using an ABLE Account
A wide variety of approved disability expenditures may be covered by an ABLE account that preserve the account owner's health, freedom, and standard of living. Expenses include but are not limited to education, housing, transportation, healthcare, basic living expense and funeral expense.
Although the ABLE Act is designed to allow disabled persons to save without affecting their access to public services, each situation is unique; therefore, it is important to check with a professional for advice that is specifically suited to your case.
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Patricia Green is a Tax Director with over 30 years of experience in providing services to small businesses, individuals and estates. She has expertise in tax compliance, estate and gift tax, wealth transfer, and succession planning.
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