By Gretchen Ross, CRTP
It has been a real struggle for families to set up a savings safety net for their loved ones who are disabled. If a disabled person’s savings are too high, they are at risk for losing benefits such as Social Security, Medicaid or housing. The Achieving a Better Life Experience Act (ABLE) will change that and families will feel more secure that their loved one will have access to emergency funds even after they are gone.
The ABLE Act was passed this last December as part of the Federal Extender Act. It goes into effect this year–not going back to last year. The ABLE act allows states to set up tax-exempt savings accounts for the disabled to be used for qualified expenses related to their disability. This includes but not limited to health care expenses, education, assistive technology, transportation, employment training, and personal support. It covers a lot of expenses and the list will become clearer as these accounts are set up.
The accounts will be similar to the 529 college savings vehicles. Funds going in will not be deductible from the givers tax return but all earnings will be tax-exempt. To qualify, the beneficiary must have become severely disabled or blind before the age of 26. The maximum annual contribution cannot be more than the annual gift tax exclusion amount which is $14,000 for 2015. The account can reach $100,000 before any means-tested benefits are impacted.
Now, what happens if the funds are withdrawn to use for something that are not a qualified expense? There is a 10% penalty on the funds withdrawn and the earnings on the funds that are withdrawn do become taxable. ABLE accounts can be rolled over into another ABLE account for the same person or for a sibling who is also disabled.
This is just an overview of what is coming. More information shall become available as states set up these accounts.
