What Is an ABLE Account?

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An ABLE account is a type of tax-advantaged savings account that can help people with disabilities save and invest for the future. The Achieving a Better Life Experience (ABLE) Act of 2014 created these accounts, and they've since become an important part of financial planning for many Americans.

How Does an ABLE Account Work?

ABLE accounts offer tax-saving benefits for qualified expenses and allow a person with disabilities to accrue assets while remaining eligible for income-dependent benefits such as Supplemental Security Income (SSI) and Medicaid. Like 529 plans for college savings, ABLE accounts are administered by the states.

Each beneficiary can have one ABLE account, although multiple people can contribute to that account. Contributions to an account aren't federally tax deductible, but some states offer an income tax deduction for contributions. The money can grow in the account by earning interest on savings; some state programs even allow you to invest the money.

Withdrawals from the account are tax-free if you use the money for qualified expenses, such as rent payments or durable medical equipment. The list of qualifying expenses is long and includes spending on things like education, housing, transportation, health, wellness, assistive technology, personal support and employment support.

While states set up and manage ABLE accounts and programs, you don't necessarily need to establish an ABLE account where the beneficiary resides—many states accept out-of-state residents. Depending on where you live, the ABLE account you set up may have different total account fund limits, investment options, annual fees and benefits (such as an associated debit card or checks).

The ABLE National Resource Center, created by the nonprofit National Disability Institute, has a tool you can use to compare state programs side by side.

Who Is Eligible for an ABLE Account?

There are several ways eligibility criteria can be met, but ABLE accounts have an age of disability onset requirement that must be met by every beneficiary: They must have been blinded or disabled before turning 26. Beneficiaries can be older than 26 to open an account as long as their disability began before their 26th birthday.

In addition to age of onset requirement, the beneficiary must meet one of the following:

  • Eligible for SSI or SSDI: Receive or be eligible for Supplemental Security Income or Social Security Disability Insurance (SSDI).
  • Have a Compassionate Allowance Condition: The Social Security Administration (SSA) publishes a list of conditions that may qualify the beneficiary.
  • Self-certify: Alternatively, the beneficiary can self-certify their disability with a signed diagnosis from a licensed physician. To self-certify, the beneficiary has to be blind or have an impairment that leads to marked and severe functional limitations, as defined by the SSA.

The ABLE account's beneficiary can open and will own the account. If necessary, however, a parent, legal guardian or someone with power of attorney can open and manage an account for them on their behalf.

How Much Money Can You Put in an ABLE Account?

The annual contribution limit for ABLE accounts aligns with the federal gift tax limit, which was $15,000 in 2018, 2019 and 2020, but may change in the future. This total amount limit applies per account, not per person contributing to the account.

Additionally, the beneficiary can contribute income they earn each year up to the poverty line amount for a one-person household ($12,760 for the contiguous U.S. in 2020). But additional income contributions aren't allowed if the beneficiary also receives employer contributions to 401(a), 403(a), 403(b) or 457(b) accounts.

States may also impose total account balance limits, which generally range from around $200,000 to $500,000. No one can contribute more money to the account once the limit is reached, although the funds within the account can continue to grow.

What are the Benefits of an ABLE Account?

An ABLE account offers a range of benefits:

  • Up to $100,000 is excluded from the beneficiary's assets: Certain public benefits programs, such as SSI, food stamps and Medicaid, require a means or resources test. You might not qualify if you have over $2,000 in savings, retirement funds or assets. However, up to $100,000 in an ABLE account doesn't count toward this limit.
  • Potentially higher asset exclusions for state benefits: Some states may exclude a larger amount than $100,000 if it's in an ABLE account when determining eligibility for means-tested programs.
  • Contributions count toward the saver's credit: The beneficiary may be eligible for the federal saver's credit, which can reduce how much they owe in federal income taxes.
  • Tax-free withdrawals for qualified expenses: Distributed earnings from an ABLE account that are used for qualified expenses aren't subject to income taxes.
  • Distributions don't count as income: Regardless of whether you use the money for qualified expenses, ABLE account distributions might not count as the beneficiary's income.

You'll want to learn the rules for taking distributions before opening an account. If you withdraw earnings from an ABLE account and use the money for a non-qualified expense, that amount is subject to income taxes plus a 10% tax penalty.

Additionally, distributions may count as a resource and impact the beneficiary's SSI benefits if they're used for non-qualified expenses or certain housing expenses. Sometimes this can be avoided by withdrawing the money in the same month you plan on spending it.

Choosing the Right ABLE Account

ABLE accounts offer a few potential tax advantages and the ability to accrue assets and invest for the future without impacting your benefits today. You can open an ABLE account with many state programs, and you'll want to compare the investment options and fees to find the one that's the best fit. Also, look into special needs trusts, another potentially helpful type of account for people with disabilities that can be opened in combination (or instead of) an ABLE account.

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