Significant progress has been made in 2016 with two states – Ohio and Tennessee – allowing contributions to ABLE accounts; and several more states expected to follow by the end of the year. Some important things to understand about these plans, and ABLE accounts in general. First and foremost – they do not, nor should they, take the place of a Special Needs Trust. ABLE accounts have a maximum limit of $100,000 to continue receiving Social Security and Medicaid benefits (higher balances will suspend eligibility); and each state’s maximum balance will match the maximum balance of their traditional 529 plans. Special Needs Trusts do not have a maximum limit. Additionally, ABLE accounts are subject to Medicaid payback – depending upon the type of Special Needs Trust this is not the case.
Individuals can only have one ABLE account, and $14,000 per year is currently the total contribution limit. Recent legislature has passed allowing eligible individuals to open an ABLE account in any State, regardless of where they reside. Currently neither Ohio nor Tennessee offer a state income tax deduction for contributions, and it’s unclear if any states will incorporate this into their accounts. Qualified withdrawals – withdrawals applied towards qualified disability expenses of the beneficiary, may be taken tax free. The definition of qualified withdrawals is extremely broad at this time – including expenses like buying an iPad or music therapy.
It’s important families have a plan for what the ABLE account is going to be used for. Although there are many investment options available, if the contributions will be applied to daily living, or short term goals, the best option is to leave the money in cash. The ABLE account vehicle provides a great opportunity for individuals with disabilities to have an emergency fund; something they’ve never been able to accumulate in the past because of the $2,000 asset limit for social security benefits.
How do you get the money out of the account? Both Ohio and Tennessee offer debit cards with their accounts, and I think it’s a safe bet to say most, if not all, plans will offer something similar. Tennessee has a 10 calendar day waiting period after a contribution has been made before funds may be withdrawn; Ohio’s waiting period is 7 business days for check contributions, and 5 business days for an ACH contribution.
Another important clarification: although the disability had to be diagnosed before age 26, there is no age limit to open an ABLE account. For example, if an individual is in their 50s, but received a disability diagnosis at the age of 16, they may open an ABLE account. These accounts are not just for families with children or young adults, if you’re unsure if you or a loved one will qualify consult an advisor or visit the ABLE National Resource Center’s web site.
ABLE accounts don’t solve all of a families’ problems, but they are a step in the right direction to providing individuals with disabilities independence and providing families with a sense of security. Although there is a contribution limit, there are no restrictions on who can contribute. An ABLE account should be considered another tool for the success of your financial plan.