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What’s the Deal with ABLE Accounts?

Congress passed the Achieving Better Life Experience (ABLE) Act in 2014, which allows disabled individuals who meet certain criteria to establish savings accounts. Doing so prior to the ABLE Act’s passage would have disqualified them from necessary government benefit programs, such as Supplemental Security Income or Medicaid.

The ABLE Act allows states to create their own tax-advantaged programs for qualified disabled Americans, also known as designated beneficiaries. Although you do not have to open an ABLE account in your home state, it may be more financially wise to do so, depending on the state in which you live.

One of the perks of having an ABLE account is that any distributions that pay for qualified disability expenses are tax-free for the designated beneficiary. Essential expenses include education, community-based supports, medical and dental care, training, housing, transportation, employment training, and assistive technology. Eligible housing expenses include rent, mortgage payments, real property taxes, gas, electricity, water, garbage removal, sewer, and heat.

If funds are withdrawn for something other than a qualifying expense, a 10% penalty will apply, and the individual will usually have to pay income taxes on the portion of funds that were withdrawn.

ABLE accounts are helpful because the funds in an ABLE account do not count toward the $2,000 cap on assets that is required in order to remain eligible for government financial assistance. Under the ABLE Act, the first $100,000 in an ABLE account is not treated as an individual’s personal assets.

The Tax Cuts and Jobs Act of 2017 increased the amount of contributions that are allowed to be made to an individual’s ABLE account. Contributions are deposits of funds from anyone into an ABLE account. In 2020, annual contributions may not exceed $15,000. Each ABLE state program sets a minimum contribution amount that is required to open the account initially, and each subsequent contribution must equal a minimum amount. Individuals are only allowed to have one ABLE account.

In order to open an ABLE account, the designated beneficiary must meet one of three criteria: 1) be eligible for Supplemental Security Income based on disability or blindness that began before the individual turned 26-years-old; 2) be entitled to disability insurance benefits, disabled widow’s or widower’s benefits, or childhood disability benefits based on disability or blindness that began before the individual turned 26-years-old; or 3) be someone who has certified or whose parent or guardian has certified that he or she meets the criteria for a disability certification that began before the individual turned 26-years-old.

In the State of New York, eligibility criteria are slightly different. To qualify for an ABLE account in New York, the designated beneficiary must be: 1) entitled to Supplemental Security Income or Social Security Disability benefits because of a disability; 2) be classified as blind; 3) have a disability that is included on the Social Security Administration’s list of Compassionate Allowances; or 4) have a written diagnosis from a physician that indicates a medically-determinable mental or physical impairment that results in severe functional limitations that can be expected to last for at least one year or result in the individual’s death.

Additionally, in New York, a parent or legal guardian or a person granted power of attorney on behalf of an eligible individual as well as the designated beneficiary can open an ABLE account.