We all know a little something about putting money away in the present to save for the future. We fund our retirement with IRAs and take advantage of the tax-friendly investing options. We start contributing to 529 College Saving Plans for our children in order to send them to school later in life. Now, under recently passed federal legislation, there is a new tax-advantaged savings account to assist those with disabilities, known as the Achieving a Better Life Experience Act of 2014 (ABLE Act).* The ABLE Act was signed into law by President Obama on December 19, 2014 after receiving overwhelming bipartisan support in both the House and Senate. It aims to not only directly help those individuals with disabilities, but to also aid their families by enabling them to better support their loved ones financially. Although other options like Special Needs Trusts exist and can be effective, this new act will allow for a savings opportunity that is significantly more cost efficient. Continue reading below to get a better understanding of what the ABLE Act is all about.
How Does it Work?
An ABLE account is a variation of a 529 account, with the most important factor being that income generated by the account is NOT taxed. Disabled individuals still will be able to receive benefits from Supplemental Security Income (SSI), Medicaid and other programs, as long as the ABLE account balance does not exceed $100,000. If it does surpass this amount, then SSI benefits become suspended, but program eligibility remains intact (should the ABLE account balance fall back below the $100,000 threshold, SSI benefits would once again be made available). Like the 529 Plan anyone can contribute the ABLE account but TOTAL contributions from all donors cannot exceed $14,000 per year. This is in stark contrast to the 529 Plan and other custodial accounts which allow each donor to contribute up to $14,000 per year without having to file a federal gift tax return. State-provided investment options will allow for tax-free growth in the account that can be beneficial to the disabled individual over his or her lifetime.
ABLE account holders must have become disabled before the age of 26 and either receives Social Security Disability Insurance, SSI, or files a disability certification.
Withdrawals from ABLE accounts can be used to cover education, housing, transportation, employment training and financial management expenses for a disabled individual. These qualified expenses are exempt from federal and state income taxes. ABLE accounts are also exempt from inheritance tax. Previously, families had to worry about the possibility of losing benefits from Government-sponsored programs if they decided to save for a disabled loved one. With the ABLE Act now passed by federal legislature, this should no longer be a concern.
ABLE Act vs 529 Plan
Just as a 529 Plan offers flexibility in the investment philosophy for a child’s college savings account, the ABLE ACT will enable families to choose how to invest their money in the account. In addition to the previous disability benefits, this Act allows the possibility for money to vest over time and build tax-free just as a 529 plan would.
Whether directly or indirectly, most of us know someone who the ABLE Act may impact in a positive way. Do that person a favor by taking a minute to either mention what you now know about the ABLE Act, or by forwarding this blog post to them. Those with disabilities play an integral part in the lives of many, and opening a tax-advantaged savings account could greatly influence their and their families’ financial well-being. The ABLE Act has the ability to better the lives of many, so spread the word! Click here to read more into the legislation and bill.
* It is important to note that although this is a federal law, individual states are allowed to have certain regulations on the ABLE Act. Currently, Pennsylvania is still processing this legislation.