In 2014, back when lawmakers actually gave a shit about the hardships of everyday folks, Congress created ABLE accounts to help disabled young people and their families pay for their care.
With an ABLE account, families can set aside money and watch it grow. They can then spend those earnings tax-free on expenses like medical treatment and housing. On average, such expenses add about $8,000 a year to a family’s cost-of-living bill. Congress even managed to aptly capture the real essence of the term ABLE, which is an acronym for Achieving a Better Life Experience.
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What Is an ABLE Account and How Does It Work?
ABLE accounts are structured much like 529 college savings plans in that the states run accounts, not Uncle Sam.
You set aside money, and the income you earn through investments over several years won't be taxed when you need to withdraw it. Contributions to the account are made with after-tax dollars, which means you can’t deduct the money on your federal taxes. Like 529 plans, some states offer state income tax deductions for contributions.
Any person — family, friend, or stranger — can contribute to the account, though annual contributions are capped at $15,000.
Total lifetime contributions halt at $300,000 for most accounts. If your home state doesn’t offer an ABLE account, you can purchase one from another state. Some accounts require no money down to open. And if you have a 529 plan, you can transfer the money to your ABLE account.
What Expenses Does an ABLE Account Cover?
The list is fairly long, but the expenses must pay for the cost of treatment or simply living with a so-called “qualified disability,” whether physical or mental. According to national disability advocates, the following expenses are covered by an ABLE account:
- Assistive technology (robots)
- Administrative fees and services
- Education and tutoring
- Employment training and support
- Financial management
- Legal fees
- Medical treatment
- Personal-support services
Why Did Congress Create These Accounts?
For years, Congress ignored the desperate needs of Americans with disabilities and their families and caregivers.
In addition to the 529 plan for college savers, Congress created other tax-advantaged plans to encourage people to save and pay for their health and medical costs. These included flexible spending accounts (FSAs) and health savings accounts (HSAs).
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Most disabled Americans rely on the federal government’s Medicaid or Supplemental Security Income (SSI) programs for badly needed help to pay their huge bills. Wealthier families use private insurance.
Before Congress created the ABLE program, federal rules actually penalized some families for setting aside money that they could use to pay their disabled child’s care. If they had more than $2,000 worth of financial assets, they’d be denied government assistance.
Most families affected by this restriction were elderly parents who could no longer care for their children or who had passed away, leaving their estates to their kids.
To get around this restriction, more resourceful families use special-needs trusts or pooled-income trusts. But with an ABLE account, families can sock away $100,000 without affecting their Medicaid or SSI eligibility.
How to Open an ABLE Account
Opening an ABLE account is pretty straight forward. There are 30 programs, and most will enroll folks from out of state. You can also open most of them online. The ABLE National Resource Center has a handy online tool to help you compare state plans to find the one that best suits your needs.
Unfortunately, the accounts are not available to every disabled American. To qualify, the person (the beneficiary) must have been blind or disabled before age 26. However, there are exceptions if you are older than 26 and not receiving any government benefits. This age limit, for obvious reasons, doesn’t sit well with many disability advocates who are pushing to change the age threshold to 46.
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Things to Consider
Another catch? If you withdraw your earnings to spend on non-disability expenses, you’ll be slapped with a 10-percent penalty and the money you spend will be taxed as income.
There are a few other issues you must worry about, too. First, you need proper documentation of your qualified expenses.
Second, mind those account fees and other expenses. I can’t stress this enough. These parasitic costs will eat away at your earnings over time.
The key fee you must focus on is the underlying expense ratio. Most accounts charge around 0.1 percent annually, which comes out to $1 for every $1,000 invested. Also watch out for monthly maintenance fees levied if your account balance falls too low.
Lastly, look for plans offering tax breaks on state income taxes, contribution matches and rewards, and debit or purchasing cards that can help you track your expenses. Keep in mind that some state plans are both cookie-cutter and exclusive. Michigan’s plan, for example, offers a crowdfunding tool to help encourage contributions from a wider network of family, friends, colleagues, and even complete strangers.
The Biggest Drawback of an ABLE Account
The age cutoff at 26 is by far the greatest downside. And the 10-percent penalty on withdrawals for nonqualified expenses is another bummer.
But there is a third issue that makes some ABLE accounts even less attractive: the so-called Medicaid payback. This is how it works: When the beneficiary of an account dies, the money can be transferred to a sibling’s account. But if there isn’t another sibling involved, your home state could seize the money. That said, not all states do this.
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Final Thoughts: Take Advantage of Free Money
The basic takeaway from this is that when the government offers you a tax break as an incentive to get you to save, take advantage of it. It’s free money, in a sense. Rich people do it all the time, and that’s why they’re rich.
ABLE accounts are another tool to help families cope with day-to-day costs that can add up. I can’t imagine what it’s like, especially for families whose children need round-the-clock care.
For years, many families with disabled kids used special-needs trusts to raise money while maintaining their government benefits. But trusts are for rich people. The ABLE program is designed for everyone.