New 529-ABLE programs are currently available offering tax-free saving options for families with special needs individuals. With what promises to be the first of many, current offerings include Ohio’s STABLE, Tennessee’s ABLE TN, Nebraska’s Enable and Florida’s The ABLE United account. Some such as Florida’s version are only available to residents of the state, while others are open to nonresidents as well.
Prior to ABLE accounts, special needs trusts were the only way for families to save for a disabled child without losing access to crucial benefits such as Social Security insurance and Medicaid benefits. The downside to special needs trusts is that they involve lawyer’s fees, tax-sensitive investment management and a variety of maintenance and compliance costs. Often, the complexity and costs associated with setting up a special needs trust put them out of the reach of many families. ABLE accounts now offer a simple way to save for families that cannot manage a special needs trust, or can serve as a supplement to those who have them. Now let’s look at how 529-ABLE accounts technically work.
Rules, Rules, Rules
Generally, 529-ABLE accounts work similarly to 529 college savings accounts. 529-ABLE accounts all share the following features:
- Tax Savings: Withdrawals and earnings for qualified expenses are tax free. Qualifying expenses for 529-ABLEs include things such as medical and educational needs, job training and housing.
- Medicaid Benefit Protection: 100 percent of the assets inside an ABLE account are disregarded for purposes of Medicaid benefits qualification calculations.
- Social Security Benefits Shielding: Accounts with balances greater than $100,000 can reduce SSI benefits or even cause them to be suspended, but anything less than that is of no concern.
The benefits shield effect of 529-ABLE plans are truly a game changer for families that could not afford a special needs trust. Prior to ABLE accounts, disabled persons could only have $2,000 in savings before being cut off from Medicaid, effectively resigning them to live their lives in poverty.
Beware – Not all Rules are Created Equally
Here is where things can get tricky. Congress sets the basic rules of ABLE accounts, but the details vary by plan. For example, the following apply to all ABLE accounts, regardless of type:
- Only available for individuals disabled before they turned 26 years old
- An individual can open only one account
- The maximum annual contribution is linked directly to the federal gift tax exclusion ($14,000 per year currently)
So what is different? A lot of things, including investment choices, fees and in-state resident benefits.
State by State
Every state does things a little differently. The complexity and nuances of the different rules and attributes will only expand as more states begin to offer their versions of ABLE plans. Here are some highlights of differences between the current offerings:
- State Tax Deductions: Nebraska offers residents a state income tax deduction of up to $10,000 for contributions, while Ohio, Tennessee and Florida offer no deduction.
- Fees: Every state’s investment options have different fee structures and some, such as Ohio’s STABLE program, charges a $2.50/month administrative fee ($5/month for out-of-state residents) in addition to the asset-based fees.
- Lifetime Maximums: Lifetime maximums for accounts range from a low of $350,000 in Tennessee up to $426,000 in Ohio.
In the End
ABLE accounts promise to help an entire new class of disabled persons live with more independence and freedom. Keep in mind that ABLE accounts are not designed to be a substitute for a special needs trust – but they are a good option to help improve the life of someone with a disability and save taxes at the same time.