As one of the latest financial products, the ABLE account is a 529 account, which contains a variety of bells and whistles specifically for Americans with disabilities.
After years of grassroots advocacy efforts in the disabled community, the ABLE account was born in legislation in December 2014.
Why open an ABLE account?
529 accounts are traditionally funded by the state and used to save for your child’s college education. Although you cannot deduct your contributions, the money will grow without taxation, and there will be no taxation when withdrawing approved college fees, especially tuition fees.
What if you are Parents of disabled children, Their future in higher education may not be clear. However, an ABLE account allows you to save or invest in a potential college experience, but these funds can also be used for countless other living expenses.
In addition to saving for college, there are many reasons why parents of people with disabilities or children with disabilities may want to open an ABLE account.
Asset testing: supplementary security income and others
When you have a disability, state and federal assistance programs may make it difficult for you to achieve financial independence. For example, in order to receive supplemental security income benefits, you usually only have $2,000 in assets. The SSI resource limit for couples is US$3,000. Assets can include the value of your bank account, second car, life insurance policy, cash on hand, etc.
Welfare programs for people who meet the income requirements—usually low-income—are called “means surveys.” Eligibility is based on the means of the applicant. These types of plans make it almost impossible for individuals and families to save money because they may be disqualified when their savings reaches a certain level. For people with disabilities living near or below the poverty line, asset restrictions are particularly problematic because they are more likely to need additional savings to deal with more frequent medical and financial emergencies.
Other income-based public benefits
SSI is not the only public welfare program that has been means-tested. When you are disabled, many states may have asset restrictions related to medical assistance or medical insurance access. You may also need to pass asset testing to obtain various other benefits.
The ABLE account solves this problem through many programs. The first $100,000 you deposited in your ABLE account cannot be counted towards SSI benefits. Any amount held in the ABLE account cannot be counted towards almost all other Federal Means Survey benefits asset tests-such as Medicaid.
The ABLE account can be used as a tax-friendly savings account or as an investment tool. The interest earned in your ABLE account is not subject to federal income tax. Depending on your state of residence and the state where the ABLE account was issued, you may also not have to pay state taxes on interest.
Looking for tax parity
In some states, even if you purchase from an out-of-state ABLE plan, you can avoid the state tax burden on your ABLE account.
“Pennsylvania provides residents with’tax parity,’ which allows them to purchase the ABLE plan across states while maintaining Pennsylvania’s tax advantages,” said Paul Curley, director of 529 & ABLE Research. ISS market intelligence.
He said that you should check your state laws to review any potential state tax benefits related to the ABLE program, including tax parity.
It is important to note that for state and federal income taxes, all these tax savings have a caveat: it only applies if you withdraw funds for eligible disability expenses.
What are eligible disability expenses?
With a traditional 529 account, as long as you use the withdrawals for qualified expenses related to higher education, or in rare cases for K-12 education, you do not need to pay interest.
ABLE accounts are different. Although you can use the money saved in this account for higher education, the list of eligible disability expenses is much more reliable. Almost everything related to the life of the disabled can be counted as eligible disability expenses for the ABLE account, including but not limited to:
- Housing expenses
- Employment training and support
- Assistive technology
- Personal support services
- Health care costs
- Prevention and health
- Financial Management Service
- Administrative Service
- lawyer fee
- Funeral expenses
- Other basic living expenses
Who can open an ABLE account?
Currently, if you have a certificate of disability from the Social Security Administration and you are under 26 years of age at the time of illness, you are eligible to open your own ABLE account. If your disabled child meets these same requirements, you can also open an ABLE account on their behalf.
Eligible individuals do not have to receive Supplemental Security Income (SSI) or any other benefits to be eligible.
Legislative efforts to expand qualifications
The age requirement for ABLE accounts is problematic because many disabilities do not appear until later in life. In addition, 25% of American adults become disabled between the age of 20 and the traditional retirement age. Because of these facts, legislative work is working hard to raise the age.
The standard annual contribution limit for an ABLE account is $15,000. Anyone can contribute to this maximum-disabled people, family members, friends, etc.
By 2025, adults with disabilities who are allowed to work through the ABLE to Work Act will almost double their contributions to the ABLE account.
According to the regulations of the US Internal Revenue Service, any income from your work can be deposited into the ABLE account, up to the federal poverty level. By 2021, this means that in addition to the standard contribution limit of $15,000, qualified individual residents in 48 adjacent states can contribute an additional $12,880 from their work income. This brings the total annual contribution of most states to a maximum of $27,880.
“Although ABLE to Work will end in 2025, many advocates and stakeholders are focused on expanding the ABLE to Work clause,” Curley said.
Avoid Medicaid returns
When the beneficiary dies, any funds remaining in the ABLE account balance can be used for funeral expenses. In many states, any balance in the beneficiary’s ABLE account after taking into account the funeral expenses will be paid to the state to repay Medicaid’s expenses.
Compare at the ABLE National Resource Center
To date, more than 40 states have their own ABLE plans, and you can purchase plans across states.
When you decide which state’s ABLE account is best for you and your children, you need to consider any state tax incentives, state-level Medicaid return rules that require reimbursement of certain payments after death, and expenses.
“Most plans have annual or monthly account maintenance fees and investment-related expenses,” Curley explained. “Please note All Consider the cost of these two categories. “
If you want an easy way to compare plans and save money across states, you can use things like ABLE National Resource Center.
Pittsburgh writer Brynne Conroy is the founder of the Women’s Thrift blog and the author of “The Handbook of Feminist Finance.” She is a regular contributor to The Penny Hoarder.