For families of those with disabilities, there was no tax-advantaged way for them to save for those individuals. A new tax law change allows states, beginning in tax year 2015, to create “Achieving a Better Life Experience” (ABLE) accounts. These are tax-free accounts that can be used to save for disability-related expenses.
Some of the attributes include the following:
- ABLE accounts can be created by individuals to support themselves, or by families to support their dependents. Funds held in an ABLE account are not subject to federal tax.
- Assets can be accumulated, invested, grown and distributed without any federal tax impact.
- Contributions to the accounts are made on an after-tax basis (no deduction).
- Assets will grow tax-free and are not subject to tax, as long as they are used for disability related expenses.
To qualify, the expenses must benefit an individual with a disability and are related to the disability. These include education, housing, transportation, employment support, health, prevention, wellness costs, assistive technology, personal support services and other related expenses.
If distributions are used for nonqualified expenses, any earnings in the account will be subject to income tax, plus a 10% penalty. Each disabled person can hold only one ABLE account. The total annual contributions, by all individuals to any one ABLE account, are limited to the amount of the gift tax exclusion ($14,000 in 2015). Aggregate contributions will be subject to the state limit for education-related Section 529 accounts. ABLE accounts can only be rolled over into another ABLE account for the same individual, or into another ABLE account for a disabled sibling.
To qualify, individuals must be blind or severely disabled, and must have become so before turning age 26. The disability must be based on a marked and severe functional limitation, or receipt of benefits under the Supplemental Security Income (SSI) or Social Security Disability Insurance (DI) programs. Assuming the disabled individual has no other assets, if the balance in an ABLE account exceeds $102,000, eligibility for SSI benefits will be suspended but not terminated. The individual, however, is still eligible for Medicaid.