Tax-Free Savings for Loved Ones with Disabilities
Financial planning for families with special needs is difficult and complex. Parents face overwhelming costs associated with raising a child with disabilities and navigating the challenges a working age adult experiences as they move towards independence. These decisions can impact the future of a disabled child and adult in a number of ways; will they live comfortably with financial independence or struggle, waiting on special services to provide for their special needs while depending on government benefits for the basic necessities of life?
58 million people live with disabilities in the United States; many depend on government provided disability income for food, housing and healthcare assistance, and must meet a means test to qualify. Typically, people with disabilities are disqualified from federal benefits if their assets are valued in excess of $2,000; to provide additional assistance, families are permitted to establish special-needs trusts (SNT) and fund them to provide for expenses not covered by federal benefits.
Until December 2014, a special-needs trust was the only legal way to save without jeopardizing eligibility for means-based federal benefit programs.
On December 19th, President Obama signed the Achieving a Better Life Experience (ABLE) Act of 2014. The ABLE Act allows states to set up savings programs (similar to college 529 plans) benefiting those with disabilities and without jeopardizing their federal or private benefits. The ABLE Act provides individuals with disabilities the same types of flexible savings tools that other Americans have through college savings plans (529), health savings accounts (HSA) and individual retirement accounts (IRA). Similar to a SNT, funds in ABLE accounts will supplement benefits provided by the government and private insurance.
It’s one thing to save money for education and retirement, but to save tax-free for a loved one with disabilities is outstanding. The ABLE Act is a huge and welcome step forward for disabled Americans.
ABLE accounts, sometimes referred to as 529A accounts are tax-advantaged savings vehicles for families to contribute (up to $14,000 annually) for disability related expenses. Only one ABLE account per individual is permitted and must be opened in their home state, unlike 529 college accounts, where students are allowed multiple accounts regardless of where they live.
However, similar to 529 college accounts, there will be multiple options to open ABLE accounts and multiple investment strategies. Also, money invested in ABLE accounts is not taxed as long as it is withdrawn to pay for qualified expenses, including housing, tutoring, education, transportation, assistive technology, healthcare, employment training, legal fees and financial management. Contributions can be made to the account by anyone (account beneficiary, family and friends) but are not tax deductible.
Eligibility for an ABLE account requires an individual be diagnosed with a “qualified disability” prior to age 26 regardless of their current age. Of the 58 million disabled individuals in the US approximately 10% have disabilities qualifying them for an ABLE account. These disabilities range from intellectual, developmental and physical impairments to mental illness.
States are responsible for establishing and operating ABLE accounts. Currently, the Treasury is developing guidelines regarding documentation, basic account information, eligibility standards. Accounts cannot be established until the Treasury has finalized its regulations, expected by the end of 2015.