Tax-advantaged savings for disabled children
At Parsec, we strive to provide you with information to better your financial future. There are many tax advantaged accounts that we recommend throughout the planning process, and the ABLE account is one that could be discussed if it benefits your family.
Signed into law in 2014, after many years of lobbying by advocacy groups for the disabled, Congress passed the Achieving a Better Life Experience (ABLE) Act. The goal of the legislation was to provide a tool to help individuals with disabilities plan for their financial future, in a tax-advantaged way.
ABLE accounts are similar to 529 Plan college savings accounts. They are administered by the state and allow friends or relatives to contribute each year, an amount up to the gift tax exclusion, which is $15,000 for 2018. The beneficiary of the ABLE account is the account owner. Contributions are made with after-tax money; however, there is no tax deduction for the person making the gift. Similar to 529 plans, the account grows tax-free and withdrawals for qualified expenses are not taxable.
Perhaps one of the most significant benefits of the ABLE account is the exclusion of the first $100,000 from the personal assets of the beneficiary. Prior to the ABLE Act, the assets of a disabled person needed to be less than $2,000, or it impacted the ability to draw benefits such as Medicaid and Supplemental Security Income (SSI).
Currently, not every state offers an ABLE account, although some state plans do not require residency to open an account. Fees and investment choices also vary by state, so it is best to compare plans and determine if you need other options like a debit card or a checking account. If your home state offers an ABLE account, check to see if a state income tax deduction is allowed for contributions.
In order to qualify for an ABLE account, the beneficiary must be blind or disabled before age 26. Advocates for the disabled are lobbying Congress for an expansion of these rules. Talk to your financial advisor if an ABLE account sounds like it could be a part of a financial plan for your family.
Nancy Blackman, CFP®