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ABLE Accounts: A valuable financial solution for people with disabilities

Oct 27, 2022

Millions of Americans with disabilities depend on various public benefits that provide income, health care, food, and housing assistance. However, many of these benefits require meeting a means or resource test, which limits the eligibility of individuals who report more than $2,000 in assets. The federal Achieving a Better Life Experience (ABLE) Act amends Section 529 of the IRS Code to create tax-free savings accounts for eligible people with disabilities (designated beneficiaries) without jeopardizing their eligibility for government assistance programs or public disability benefits. The accounts are intended to offer a better quality of life for those with disabilities by allowing for greater independence and financial security while saving for current and future needs.

What is the Annual Contribution Limit?

Any person can contribute to an ABLE account for an eligible beneficiary, though contributions may not exceed the annual gift tax exemption. For 2022, that limit is $16,000. Increased contributions can be made to ABLE accounts by a designated beneficiary under certain circumstances, including if the beneficiary is employed and if other contributions, such as to a retirement plan, have not been made for the taxable year. In this instance, they may contribute an additional amount equal to the lesser of their annual gross income or the individual Federal Poverty Level, which for 2022 is $13,590 in the continental U.S., $16,990 in Alaska, and $15,630 in Hawaii. Under certain circumstances, rollovers from section 529 accounts can also be made to ABLE accounts.

Do I Qualify For Saver’s Credit?

Some participants may be eligible for a credit from contributions to their ABLE account. The Saver’s Credit gives a special tax break to low and moderate income taxpayers who are saving for retirement. This is in addition to the other tax benefits for contributing to a retirement account. ABLE account-designated beneficiaries may be eligible to claim the saver’s credit for a percentage of their contributions by claiming the credit on Form 8880, Credit for Qualified Retirement Savings Contributions. The credit is a non-refundable credit available to individuals who meet the following requirements:

    • They are 18 years of age or older at the close of the taxable year
    • They are not a dependent or a full-time student
    • They meet the necessary income requirements

Making a Withdrawal

While contributions aren’t deductible for federal tax purposes, both distributions and earnings are tax-free to the beneficiary if they are used to paying for qualified disability expenses. ABLE accounts can be used to pay a variety of different costs related to maintaining the Eligible Individual’s health, independence, and overall quality of life. Distributions from the account are tax-free as long as they are for qualified expenses.

Examples of such qualified expenses include:

  • Education
  • Housing
  • Health, including prevention and wellness
  • Transportation
  • Employment training and support
  • Assistive technology and related services
  • Financial management and administrative services
  • Legal fees
  • Oversight and monitoring expenses
  • Basic living expenses
  • Funeral and burial
  • Other expenses approved by the Secretary of the U.S. Treasury

It’s up to the account holder to track how the funds from the ABLE account are spent, and the total amount of distributions will need to be reported to the IRS annually. Therefore, it is strongly encouraged that accurate records be kept on how the money is spent, as both the IRS and Social Security Administration could choose to investigate whether a withdrawal was for a Qualified Disability Expense.

Funds withdrawn from an ABLE account to pay a non-qualified expense, the earnings portion of the withdrawal will be treated as income, taxed at the designated beneficiary’s tax rate, and subject to a 10% federal tax penalty. Additionally, any state tax deductions or credits taken in previous years related to contributions may need to be recaptured. Any non-qualified funds withdrawn could be counted against you to determine your eligibility for means-tested public benefits programs in the future.

Looking for more information on the potential benefits of an ABLE savings account? Contact your CRI advisor to assess if one is right for you. We’ll walk you through each step of creating your savings account, and provide the necessary guidance for accurately reporting relevant account information annually to the IRS.

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