ABLE accounts, also known as 529A disability savings accounts, are a type of tax-advantaged savings accounts designed to help people with disabilities maintain financial independence. These accounts work much like other savings accounts, with a few key differences designed to help those with disabilities access and manage their funds more easily. In this article, we will take a deep dive into understanding ABLE accounts, how they work and how they can be used to help those with disabilities achieve financial stability.
What is an ABLE Account?
ABLE accounts are an evolution of 529A college savings accounts, which are designed to help pay for higher education. These accounts allow beneficiaries to put up to $15,000 per year in after-tax dollars away into an account that grows tax-free. Funds deposited into the account can then be used for qualified education expenses, such as tuition and books, without being subject to any federal or state income taxes.
As a 529A savings plan, an ABLE account functions in a similar way. They are intended for individuals with disabilities who, due to their disability, need assistance to maintain and improve their quality of life. These accounts allow the disabled to save with tax-advantaged funds that are exempt fromSSI, Medicare, and Medicaid asset limits, giving them more financial flexibility. For ABLE accounts, the same funding rules apply: up to $15,000 per year in after-tax dollars, with any earnings on the account being tax-free.
How Do ABLE Accounts Work?
ABLE accounts are relatively straightforward to set up. After completing the necessary paperwork and providing proof of disability, a beneficiary can open an ABLE account. All ABLE accounts are governed and regulated at the state level, so the individual must select a state that offers ABLE accounts.
Once the account is open, authorised contributors (family and friends) can begin depositing money into the account. This money can then be used to pay and manage qualified disability expenses, such as medical treatment, education, housing, transportation, and job training. The beneficiary can decide how the funds are spent and can withdraw the money tax-free and without penalty as long as it is used for qualified expenses. However, if the money is used for non-qualified expenses, it may be subject to taxes and penalties.
ABLE accounts are designed to be used as supplemental income to cover living expenses and other costs associated with disabilities. For example, the beneficiary can use ABLE funds to pay for medication, durable medical equipment, personal assistance services, transportation, and much more. Additionally, the beneficiary can use the funds to pay for or receive job training or employment assistance. This ensures that people with disabilities have the funds they need to get the medical treatment, education, and employment necessary for a comfortable and independent life.
Benefits of ABLE Accounts
ABLE accounts are highly beneficial for people with disabilities, especially those who depend on government programs such as SSI and Medicaid. With these accounts, individuals can save without jeopardizing their eligibility for these programs. The accounts also have distinct tax advantages, allowing the beneficiary or authorised contributors to contribute up to a maximum of $15,000 per year in after-tax dollars without being subject to federal or state income taxes. This allows the funds to grow tax-free, so the beneficiary can keep more of their savings. Lastly, many states offer additional tax incentives to encourage people to open and contribute to ABLE accounts.
Limitations of ABLE Accounts
Despite the numerous benefits of ABLE accounts, there are some drawbacks to consider. Firstly, these accounts can only be used to cover qualified disability-related expenses. Any funds used to pay for non-qualifying expenses will be subject to taxes and penalties. Additionally, not all states offer ABLE accounts, so beneficiaries may need to find an account offered in another state. Lastly, assets must remain below a $100,000 ceiling to remain eligible for government benefits.
Investing in an ABLE Account
ABLE accounts allow individuals to invest the money that is held in the account, and numerous states offer many options for investing. Generally, ABLE accounts offer individuals the option to invest in stocks, bonds, mutual funds, and other assets. The investment options are typically managed by a financial management company and fees associated with managing the funds are typically low.
Final Thought
ABLE accounts are an excellent way for those with disabilities to save for a comfortable and independent life. These accounts offer significant tax advantages, allowing the beneficiary or authorised contributors to deposit up to $15,000 per year in after-tax dollars without being subject to federal or state income taxes. Additionally, ABLE accounts can help disabled individuals access the medical treatment, education, and employment they need to maintain a better quality of life. As long as the funds are used for qualified disability expenses and the account balance remains below the $100,000 threshold, ABLE accounts can be a powerful tool for managing and maintaining financial independence.
