Helping Disabled Children with ABLE Accounts

June 22, 2015
 

            In these times of seemingly endless partisan rancor, it is heartening to see lawmakers of both political parties actually work together to help citizens with real-life issues.

This story involves the tax act enacted late last year that extended a variety of unrelated provisions pertaining to everything from business deductions for equipment purchases to direct transfers of retirement account balances to charitable organizations. Although none of those provisions were all that exciting or even novel, this so-called “extenders” package became the legislative vehicle for a new tax break for parents of disabled children.

            The law authorized a brand-new savings mechanism called ABLE -- A, B, L, E -- which stands for Achieving a Better Life Experience. These accounts can cover a wide range of expenses that disabled children will require for their medical and educational needs, as well as special housing, transportation, and employment-related expenditures. Assistive technology and personal supports are also eligible expense categories.

            These ABLE accounts work basically like the 529 accounts that have been used to save for college expenses for the last decade or so. Individuals may contribute a total of $14,000 per year to any given child’s ABLE account. Withdrawals used for any disability-related expense are free of federal income tax, and investment earnings prior to withdrawal are not taxed.

            Unlike standard 529 accounts, however, only certain individuals can qualify for an ABLE account. Specifically, the beneficiary must have a disability that first occurred prior to that person’s reaching age 26. That person can be older than 26 now, as long as he or she can document that the disability happened before that age.

            Some parents of disabled children have established so-called “Special Needs Trusts” in the past, but those arrangements have no income tax benefits and require an attorney to create, plus ongoing expenses for investment and management. The new ABLE accounts, therefore, should appeal especially to parents who cannot afford the fees involved with those trusts, but who want some mechanism to pre-fund various expenses their children will have in the future.

On the other hand, special needs trusts have no upper limit on how much can be contributed to them, and they need not reimburse Medicaid for medical bills paid on behalf of their beneficiary. The ABLE accounts, in contrast, do have this “payback” requirement when the beneficiary dies.

            ABLE accounts are not yet available and must await state authorization. But the template has been created by the federal government, and parents of disabled children will hopefully know the specifics before the end of this year.

            If only our elected leaders would work together like this more often. This is Richard Kaplan.