Why Should I Open An ABLE Account?
There is one key question to ask when you’re considering the 529A account:
Does the disabled person in question receive any type of federal or state supports that has income thresholds (e.g., Social Security Income, Medicaid, public housing)?
If the answer is yes, then opening an ABLE account is likely a good idea, because the income saved in this account will not be counted toward total income and assets when it’s time for redetermination in those programs.
For example, if you have a savings account that contains $6,000 and SSI benefits have a resource threshold limit of $2,000, the person is automatically disqualified from receiving benefits because their income is now too high. If that $6,000 resides in an ABLE account, then it is not counted as a resource, and you can remain eligible for SSI. (Remember – it is also tax-exempt).
ABLE accounts are also eligible for the Savers Credit on tax returns, or a retirement savings contributions credit, which is up to $1,000 per year. The credit can be claimed for making eligible contributions to an ABLE account. This credit applies to disabled individuals who earn their own income and save it within an ABLE (529A) account.
If money is in a Uniform Transfers to Minors Act or Uniform Gifts to Minors Act (UGMA/UTMA) or traditional 529 and might be eligible for benefits, an ABLE can be an alternative and/or complement a special needs trust to qualify the child before they turn 18.
Another compelling benefit regarding ABLE accounts is their tax-exempt status. If you were to save money directly for your loved one with special needs, such as in a savings account, the IRS considers that money to be income and therefore taxable. The saved funds can also threaten eligibility for needed programs, such as SSI, Medicaid, and Medicare. To be even clearer, an ABLE account is not considered an asset to anyone involved with it—from the person with the disability to the executor/caregiver. There is an annual contribution limit of $16,000 (for 2022), consistent with the annual gift exclusion, aggregated across all contributions for the beneficiary.
However, it is important to note that ABLE accounts with a balance of $100,000 or higher are considered income from a Supplemental Security Income (SSI) standpoint and can threaten eligibility. Also, under a new law (IRC Section 529A(f)), any remaining balance in an ABLE account must be used to repay the state for Medicaid-assisted costs after the beneficiary’s death.
An ABLE account can also be beneficial for those with special needs trusts. An individual may use a special needs trust to fund an ABLE account, which would give them the ability to manage a portion of their own assets and strengthen their financial independence and confidence in money management. To learn more about the uses and benefits of special needs trusts, check out our legal planning page under the services expertise section of the Planning Across the Spectrum website.
Similar to how an ABLE account can help an individual with special needs maintain eligibility for SSI considering the strict limitations on income and assets, an ABLE account can also prove beneficial in maintaining eligibility for Medicaid and the Medicaid Waiver programs. While Medicaid Waivers and availability vary by state, they can provide instrumental support and services for individuals with special needs, including those related to adult day health support, assistive technology, home care services, respite for caregivers, social work services, and community integration support, among others. Taken together, the cost of such services could be unaffordable without the Medicaid Waivers which would leave many individuals critically under-supported and unable to afford necessary services if they could not remain below the limits of Substantial Gainful Activity. With an ABLE account, an individual may direct their earnings, as well as assets, into the 529A account to further protect their eligibility for and continued participation in Medicaid and Medicaid Waiver programs.
To learn more about Medicaid and Medicaid Waivers, check out our government benefits page and consider contacting Planning Across the Spectrum to learn how to help your loved one plan for their financial future.
For individuals receiving housing and nutritional assistance, such as Section 8 housing, and the Supplemental Nutrition Assistance Program (SNAP) or Temporary Assistance for Needy Families (TANF) programs, an ABLE account can be a great way to start saving money without jeopardizing their benefits. Section 8 housing and EBT-based programs are designed to help individuals with income below the poverty line which can result in individuals spending excess money each month, or putting it in a trust, so they do not lose their benefits. This behavior can further the “poverty trap,” where benefit recipients cannot see a way to actively save money or work towards being self-supporting. An ABLE account can help such individuals start saving money, such as an emergency fund, while still receiving benefits.
For those receiving housing assistance through the Department of Housing and Urban Development (HUD), including Section 8 housing, there is a greater incentive to start saving for the future. As of May 2019, HUD will exclude amounts in the individual’s ABLE account pursuant to 24 CFR 5.609(c)(17). The entire value of the individual’s ABLE account will be excluded from the household’s assets. This means that any balance that is in the individual’s ABLE account will not be counted as income for HUD purposes.
Note: An ABLE account may not be essential for everyone. If for example an individual already has a different 529 savings account, or they are only receiving Social Security Disability Income (SSDI) or the Disabled Adult Child (DAC) benefit, which are not means-tested benefits, there is less of a need for an ABLE account. While an individual can make limited transfers from an existing 529 account to an ABLE account without tax consequences, this does not mean that opening an ABLE account is worthwhile in all situations. ABLE accounts are also more restrictive than 529 accounts, having stricter specifications for who is eligible to open an account and a lower annual contribution limit.
To learn more about what an ABLE account could do for you or your loved one, check out our three-part series on;
The Financial Benefits Of An ABLE Account
The Emotional Benefits Of An ABLE Account
Maximizing The Financial And Emotional Benefits Of An ABLE Account