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Families that qualify can benefit from using both ABLE and 529 accounts to support the immediate and longer term needs of children with disabilities. Here's how.
Caring for the immediate and long-term needs of a family member with disabilities can pose a financial challenge. Fortunately, there are tax-advantaged savings vehicles that can help.
ABLE accounts — offered under Section 529A of the Internal Revenue Code — were created as a result of the Achieving a Better Life Experience (ABLE) Act of 2014.1 ABLE allows states to create tax-advantaged savings programs for people with disabilities, from which funds can be used tax-free to pay for qualifying disability-related expenses for the designated beneficiary. Funds in ABLE accounts are generally disregarded for purposes of determining eligibility for important means-tested federal and state benefits, including Supplemental Security Income (SSI) and Medicaid.
There are some important features families should consider in opening an ABLE account:
Eligibility. The designated account beneficiary must have a disability that was present prior to the age 26, although eligible individuals can open an ABLE account at any age. Individuals who meet the age requirement and receive SSI or Social Security Disability Insurance (SSDI) benefits are automatically eligible. Other individuals may be eligible if they meet the Social Security Administration’s definition of disability subject to additional qualifying criteria.
Contributions. Contributions are limited to the annual federal gift tax exclusion ($17,000 for 2023). Through December 31, 2025, the ABLE to Work provision allows individuals who are employed to contribute up to an additional $13,590 per year, subject to certain restrictions1.
Supplemental Security Income considerations. Balances up to $100,000 in ABLE accounts are exempted from the SSI $2,000 individual resource limit. When an ABLE account exceeds $100,000, SSI benefits may be suspended until the account balance falls below $100,000.2
Qualified expenses. For ABLE accounts, qualified disability-related expenses are broadly defined as those that benefit the health, independence and quality of life of the beneficiary. These include, but are not limited to housing, food, education, basic living expenses, medical expenses, transportation, assistive technology and financial assistance.
While both ABLE and 529 accounts provide tax-advantaged savings vehicles for dedicated purposes, there are some important differences:
Ownership. Unlike a 529 account — which is usually owned by an account owner (e.g., parent or grandparent) that is not the beneficiary — ABLE accounts are owned by the designated beneficiary. If desired, ABLE accounts may also be managed by an authorized legal representative acting on behalf of the account owner.
Funding. Funding the ABLE account is also more restricted than 529 accounts, with aggregate annual contributions capped to the annual federal gift tax exclusion with no five-year accelerated gifting provision.
Survivorship beneficiaries. When the account beneficiary passes away, the ABLE beneficiary’s state of residence may file a claim to all or a portion of the remaining account balance equal to the state’s expenditure for that beneficiary through their state Medicaid program. However, prior to estate recovery, funds may be used to pay for outstanding qualified disability expenses including funeral and burial expenses.
Rollovers. Unlike 529 accounts, designated beneficiaries may have only one ABLE account. Funds may be transferred from one account to another via an ABLE-to-ABLE account rollover. Additionally, the Tax Cuts and Jobs Act currently allows 529-to-ABLE account rollovers subject to the annual contribution limit.
Qualified expenses. Tax-free withdrawals of 529 plan assets are limited to the funding of a wide variety of qualified education expenses.
Families that are considering ABLE accounts could potentially benefit from using both account types together. Let’s look at an example:
Priya and Carl have a 529 college savings account for their five-year-old son, Ben, who also qualifies for an ABLE account. They would like to use some of the funds from the 529 account to pay for qualified disability expenses for Ben. To do this, they could roll up to $17,000 per year (the annual federal gift tax exclusion) from the existing 529 account to the new ABLE account, to be used tax-free for a wide variety of disability-related expenses. At the same time, the remaining assets in the 529 account stay exempt from the SSI individual resource limit regardless of balance, and the more generous funding capabilities offered by the 529 account create an opportunity for larger contributions and greater asset accumulation than the ABLE account alone. Funds in the 529 account can also be redesignated to a new beneficiary at any time. When combined, use of the 529 account along with the ABLE account provides Priya, Carl and Ben with more benefits than either account on its own.
Families that are eligible for both ABLE and 529 accounts could benefit from the opportunities they provide to address their relatives’ immediate and longer term needs. However, given some of the complexities regarding funding, ownership and expenses, financial advisors could have an important role in helping families make the most of the support provided by both accounts.
1 IRS.gov ABLE Accounts – Tax Benefit for People with Disabilities. https://www.irs.gov/government-entities/federal-state-local-governments/able-accounts-tax-benefit-for-people-with-disabilities.
2 Generally, SSI beneficiaries may have no more than $2,000 in assets for individuals and $3,000 for couples, with certain exceptions. Source: Social Security Administration.