How Does an ABLE Account Work for a Special Needs Child?

Gold Leaf Estate Planning, LLC

POSTED ON: February 14, 2023
ABLE Account Child
If you have a child or grandchild with disabilities, one of the biggest worries is often what will happen when you are no longer around to provide aid.

For many families, a plan for the future includes an Achieving a Better Life Experience, or ABLE, account to allow those with disabilities to set aside extra money without interfering with their federal aid. All but four states—Idaho, North Dakota, South Dakota, and Wisconsin—provide ABLE accounts, according to a recent article titled “ABLE Accounts Give Help For People with Disabilities” from AARP.

Other states, including California and Pennsylvania, allow people from other states to invest in their ABLE program.

Account owners are permitted to invest their money and shield earnings from taxes. Withdrawals are tax-free, as long as the money is used for approved expenses related to the account owner’s condition. Much or all of the money in an ABLE account does not count against asset limits which impact eligibility for safety-net programs, like Medicaid and Supplemental Security Income (SSI).

To be eligible for an ABLE account, the person must have a disability which began by the time they reached age 26 and in most cases, be receiving SSI or Social Security Disability Insurance (SSDI). If a person has reached the age requirement but isn’t receiving SSI or SSDI benefits, they may still be able to open an ABLE account if they meet Social Security’s disability definitions and can get a letter of disability from a doctor certifying their condition.

A person with disabilities may only have one account. However, anyone can contribute to it. The maximum contribution is 2023 is $17,000. However, those who work may deposit an additional amount up to their annual gross salary or the individual Federal Poverty Level (FPL). For an individual, the FPL in 2023 is $13,590. In some states, contributions are deductible from state income taxes.

Account owners may keep $235,000 to $550,000 in an ABLE account, depending upon state limits. If there is more than $100,000 in an ABLE account, the excess could cause SSI to be suspended, assuming they had $2,000 in other accounts. SSI can be reinstated if assets fall below the cap. The $100,000 ABLE limit does not apply to benefits from Medicaid or the Supplemental Nutrition Assistance Program, formerly known as food stamps.

Without an ABLE account, many people with disabilities face a choice between building savings and keeping benefits. If ABLE money is spent on a qualified disability expense, such as food, housing, transportation, and other things that improve health, independence or quality of life, withdrawals are free from federal and state taxes.

When the ABLE account owner dies, their estate may use funds from the account to pay for any qualified disability expenses, funeral and burial costs. The state may file a claim on the account equal to the amount the state spent on the individual’s Medicaid program. Any remaining amount passes to the owner’s estate.

Each state’s plan is different, so it makes sense to look at ABLE accounts offered by other states. Several states offer state income tax deductions for in-state residents who make contributions to an ABLE account.

Reference: AARP (Jan. 4, 2023) “ABLE Accounts Give Help For People with Disabilities”