Check this out

Before you go

Did you know you can subscribe to this type of content and get emailed when a new article is available?

Three ways that tax reform strengthens ABLE accounts

Bill Cass

Bill Cass, 05/23/18


In 2014, Congress passed the Achieving a Better Life Experience Act of 2014. The law helps families save for the care of a child with disabilities without disqualifying them from government programs. The 2014 law created ABLE, or 529A accounts, which allow families to save with tax-free earnings for qualified expenses, similar to a college savings plan.

With changes resulting from the 2018 tax reform, these families can now save even more.

Expanding limits

People with disabilities face low income thresholds for programs including Medicaid or Supplemental Security Income (SSI) benefits, which could typically eliminate coverage if the beneficiary holds more than $2,000 in savings, retirement funds, or other assets.

ABLE accounts allow families to save for such needs as transportation, education, housing, assistive technology, medical care, dental care, and other support services that may not be covered by insurance, Medicaid, or Medicare. With the future solvency of Social Security and Medicare also in question, families realize that they may need to rely even more on their own savings to cover support services for their family members with disabilities.

The 2018 Tax Cuts and Jobs Act introduced several changes to ABLE accounts, enhancing the ability of families to save more.

1. An additional contribution above the gift tax exclusion amount ($15,000) may be made by a designated beneficiary who meets certain requirements. The extra contribution is limited to the lesser of the beneficiary’s annual income or an amount equal to the poverty level of an individual ($12,060 for 2018).

2. Contributions by a designated beneficiary are eligible for the retirement savings credit. Eligible lower-income taxpayers can receive up to 50% of the amount they contributed, to a maximum of $2,000, as a tax credit.

3. Distributions from a 529 plan can be rolled over tax free to an ABLE Account if the rollover is completed within 60 days of the withdrawal.

Contribution rules require attention

Like a college savings plan, contributions can be made by a family member or friend using after-tax dollars. But there are differences with the ABLE Account. Individuals can contribute up to $15,000 annually and $300,000 or more in total into the account depending on the state of residence. The beneficiary is the account owner.

Careful consideration must also be given to individuals with disabilities who utilize Supplemental Security Income (SSI). Only the first $100,000 in an ABLE account will be exempted when calculating the beneficiary’s eligibility for SSI. At the same time, Medicare is not affected by the amount in the ABLE account.

Establishing an account

It is important that investors understand the tax rules around ABLE accounts. Meeting with a financial advisor can be an important first step. Account eligibility is limited to individuals with significant disabilities, where the onset of disability occurred before the age of 26.

311784

Putnam blogs are Alexa-enabled

Get started by saying “Alexa, ask Putnam Investments what’s new?” to hear latest headlines and full posts.

Amazon Alexa enabled
About this blog

Financial-planning experts Bill Cass and Chris Hennessey weigh in each week with a range of insights about complex financial planning needs.

You may also be interested in: