How an ABLE Account Helps Individuals with Disabilities Save for the Future
As a CERTIFIED FINANCIAL PLANNER™ and a financial coach, I understand that living with Special Needs and caring for people with disabilities can be very challenging for families and individuals. A simple fact of life for people with disabilities is that they can often be challenged not only with their disability but with a host of other expenses relating to living with their disability. Depending on the disability in question, you could be adding quite a bit to the amount you need to save for medical expenses each year.
Many of these families rely on assistance from the government to help with therapies and medical expenses. Yet... the government has rules that cap the maximum amount of savings a person with a disability can have, and once over the amount the is a high likelihood for them to lose their much needed assistance.
According to the Center for Disease Control, 25.6 percent of adults in Texas were disabled in 2015. Expenses for disabilities also make up about one-third of all healthcare expenses in the US. On top of health care expenses, disabled people also must live and function, which means they must also pay for all of the other day-to-day expenses we're all familiar with. To say it a little more bluntly, if you think living is expensive, try living with a disability. So, when it comes to your finances and your financial plan, what can you do if you or a loved one is living with a disability?
One of the scarier parts of finance when working with someone who has a disability is walking the line between bettering their situation and doing something that may impact their eligibility for assistance. As someone who works with people and their finances, I put quite a bit of thought and consideration into and take very seriously. Just as there's never a good time to become disabled, there's never a good time to lose what assistance you may be receiving from the state or federal government.
This is where the new ABLE account comes in. In 2014, the Achieving a Better Life Experience Act was passed. This enabled the creation of what is known as an ABLE account, which is essentially a savings account for those with disabilities that comes with tax advantages. These accounts can receive post-tax contributions and are otherwise tax-free to the account holder. Anyone can contribute to an individual's ABLE account, and in some areas, those contributions are even deductible from your state income tax as contributions. (work closely with your tax professional!)
For many, the best part of an ABLE account is that as long as the funds are used for qualifying disability expenses, they won't be held against your eligibility for needs-based public benefits. However, it must be mentioned that this luxury is only applicable as long as your ABLE account funds do not exceed one hundred thousand dollars. At that point, your needs-based public benefits may be reduced. It also must be noted that ABLE accounts vary from state to state. Many states have their own version of ABLE accounts, however not all do. However, one great thing about many ABLE account programs is that you're not necessarily required to be a resident of a state to qualify for their plan.
Who's Eligible for an ABLE Account?
So, not everyone will qualify for an ABLE account. You obviously must have some identifiable and provable disability to qualify, but the stipulations don't stop there. To get an ABLE account, you must have had a disability before you turned twenty-six. Suppose you were on SSI (Supplemental Security Income) or SSDI (Social Security Disability Insurance) before turning twenty-six. In that case, you'll be eligible right off the bat for most state's ABLE accounts. However, if you weren't on SSI, many ABLE account programs will require you to provide proof of your disability before the cutoff age. This can typically be done through physician documentation that can be obtained by contacting your doctor.
You can see how the Social Security Administration defines a disability on their website here. In essence, they define a disability as having an inability to produce income because of a condition (mental or physical) that can be expected to result in death or will last longer than a year. In children, their definition of a disability is essentially the same but substitutes the ability to produce income for having functional limitations.
ABLE Account Considerations
So, obtaining an ABLE account for someone who has disabilities is relatively cut and dry when it comes to eligibility. There are other factors that you may want to consider before opening or when opening an ABLE account.
Who can contribute to an ABLE account?
While it could depend on your state and its particular regulations, in general, anyone can contribute to an ABLE account. This includes the account holder, parents, and outside parties. There are other considerations to be made, however. As of 2020, the maximum someone can personally contribute to their own ABLE account is $12,490 per year. An outside individual may contribute up to $15,000 per year. Outside of those contribution caps, the main thing to keep in mind is that your account can only hold up to $100,000 before it will affect your Supplemental Security Income. The limits on outside contributions are set by the Federal Gift Tax Exclusion.
Who will manage the account?
If you're considering opening an ABLE account either for yourself or for a loved one, the decision must be made as to who will manage the account. While only disabled people may be the account owner, an account may be opened and managed on behalf of that individual by a court-appointed agent, parent, sibling, grandparent, or representative from the Social Security Administration.
What are qualifying expenses?
Qualifying expenses are somewhat vague, and this is on purpose. This is because the primary goal of an ABLE account is to improve the quality of life of an individual with a disability. The definition of an ABLE account qualifying expense is "expenses for items or services needed to maintain or improve your health, independence or quality of life." However, according to the ABLE National Resource Center's website, this translates to "education, housing, transportation, employment training and support, assistive technology, personal support services, health prevention and wellness, financial management, administrative services, legal fees, expenses for oversight and monitoring, and funeral and burial expenses."
ABLE Account Recap
To quickly recap, an ABLE account is a tax-advantaged account that's offered to those with qualifying disabilities that began before they turned 26. The easiest way to qualify is to start taking SSI or SSDI before turning 26; however, you may still be eligible to open an ABLE account with proper documentation. An account may be opened by someone who is disabled or opened for someone who is disabled on their behalf. While anyone can contribute to an ABLE account, there are yearly caps for both account owners and outside parties, and your ABLE account must stay under $100,000 to not affect any needs-based assistance.
A CERTIFIED FINANCIAL PLANNER™ Can Help Your Family Create a Customized Financial Plan for Family
Members with Special Needs.
If you or someone you love is disabled and would like to learn more about what financial options may be available to them, please contact me. Together, we can go over your specific situation and what may be done to assist you in the most efficient way that won't affect your assistance. On top of ABLE accounts, special needs trusts are an article in their own right but can work well with ABLE accounts as long as the proper steps and precautions are made. Please, feel free to call or email to schedule an appointment with me if you're interested in learning more about ABLE accounts or financial options for the disabled. Together we can create a unique and innovative approach that will ensure you're set up to tackle your finances - no matter what your situation is.
Until next time...this is Melissa Making Cents!
Melissa Anne Cox, CERTIFIED FINANCIAL PLANNER™, is also a College Planning and Student Loan Advisor and Financial Coach in Dallas, Texas.