There’s a tax-advantaged way for taxpayers to save for the needs of family members with disabilities without losing eligibility for other government benefits they’re entitled to. This can be done through an ABLE account, which is a tax-free account that can be used to save for disability-related expenses.
ABLE accounts can be created by eligible individuals to support themselves, by families to support their dependents or by guardians for the benefit of their wards.
Eligible individuals must be blind or disabled and must have become so before turning 26. They must be entitled to benefits under the Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI) programs. Alternatively, an individual can become eligible if a disability certificate for the individual is filed with IRS.
Any person may contribute to an ABLE account. While contributions aren’t tax-deductible, the funds in the account are invested and grow free of tax. The account’s investment directions can be changed up to twice a year.
Distributions from an ABLE account are tax free if used to pay for expenses that maintain or improve the designated beneficiary’s health, independence or quality of life. These expenses include education; housing; transportation; employment support; health, prevention and wellness costs; assistive technology and personal support services; and other IRS-approved expenses. If distributions are used for nonqualified expenses, the portion of the distribution that represents earnings on the account is subject to income tax plus a 10% penalty tax.
An eligible individual can have only one ABLE account. The total annual contributions by all persons to that account can’t exceed the gift tax exclusion amount ($16,000 in 2022 adjusted annually for inflation). If the designated beneficiary is employed or self-employed and isn’t covered by an employer’s retirement saving plan, he or she can make additional contributions before 2026, in excess of this limit, up to the lesser of the federal one-person poverty line or the beneficiary’s compensation.
There’s also a limit on the total balance in the account. This limit, which varies from state to state, is equal to the limit imposed by that state on qualified tuition plans (Section 529 college savings accounts).
ABLE accounts can generally be rolled over only into another ABLE account for the same individual or into an ABLE account for a sibling who is also an eligible individual. For transfers made before 2026, amounts from qualified tuition programs (529 accounts) can also be rolled over to an ABLE account without penalty if the ABLE account is owned by the designated beneficiary of that 529 account, or a member of that designated beneficiary’s family. These rolled-over amounts are counted towards the overall limitation on amounts that can be contributed to an ABLE account within a tax year, and any amount rolled over in excess of this limitation is includible in the gross income of the distributee.
ABLE accounts have no impact on an individual’s Medicaid eligibility. However, ABLE account balances in excess of $100,000 are counted toward the SSI program’s $2,000 individual resource limit. An individual’s SSI benefits are suspended, but not terminated, when their ABLE account balance exceeds $102,000 (assuming the individual has no other assets). In addition, distributions from an ABLE account to pay housing expenses count toward the SSI income limit.
If an eligible individual dies, any amount remaining in the account after Medicaid reimbursements goes to the deceased’s estate or to a beneficiary and will be subject to income tax on investment earnings, but not to a penalty. The designated beneficiary of an ABLE account can claim the saver’s credit for contributions made before 2026 to his or her ABLE account
If you have any questions regarding ABLE accounts, contact your Henry+Horne advisor.
Tiffany McBride, CPA