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David Fulton is a Colorado Springs, CO fee-only financial planner providing Hourly and On-Going Financial Planning and Investment Management. While he works with a broad range of clients, David specializes in working with Active and Retired Military, Federal Employees, and Families with Special Needs Children.
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This post is about the Achieving a Better Life Experience Act of 2014 (ABLE). You've probably heard of it. Its big news in the Special Needs community.
What is an ABLE Account?
The 529 College Savings plan gave parents an amazing way to save for college for their children. However, parents of special needs children who would not be attending college had no way to save for their children's future needs, such as therapy or housing options. Furthermore, families that did try to save money for such things put their children's access to government assistance at risk. The ABLE Act amended Section 529 in order to correct this.
Prior to the ABLE Act , an individual with more than $2,000 of countable resources became disqualified for Supplemental Security Income (SSI). Furthermore, there was no way for persons with a disability to save or have access to their own funds. Since 2014, that has all changed. ABLE accounts are now owned by the individual with a disability. He or she has direct access to the funds unless a parent or legal guardian makes decisions for the person in the event of cognitive impairment. This feature is important, because it gives adults who are capable of handling their own finances the ability to become as independent as possible. If they are working, they can save all or a portion of their income directly to their ABLE account and still stay below the $2000 benefits threshold for social security benefits.
The beneficiary of an ABLE Account must have become blind or disabled before age 26. If they meet the age criteria and are also already receiving government benefits such as SSI and/or Social Security Disability Insurance (SSDI) they are automatically eligible. If they are not receiving SSI and/or SSDI, but still meet the age requirement, they could still be eligible if they meet Social Security’s definition and criteria regarding significant functional limitations and receive a letter of certification from a licensed physician. This age restriction excludes many people with disabilities, but it was necessary to the get the ABLE Act passed through Congress at the time because of concerns of expense and lost tax revenue.
Benefits, Limitations, and Considerations
Like a traditional 529 college savings account, there are contribution limits for individuals (and families) wishing to contribute to an ABLE account. As of 2018, an individual can contribute up to $15,000 a year to their ABLE account, tied to the annual limitations for gift giving.
Others can also contribute to the account. This is important because there is now a place to direct gifts from well-meaning relatives without impacting your child's benefits. One limitation, however, is that an individual with a disability can be named as the beneficiary of only one ABLE account. This differs from a 529 where you can own multiple accounts in different states. So choose an account wisely.
Accounts can accept additional funds above $15,000 in certain circumstances. As mentioned above, working individuals can contribute their salary to their ABLE account. The Able to Work Act gives working adults the chance to save and spend their own money; a win for independence. As of 2018, the amount that can be saved directly from a salary is $12,060 and is tied to the Federal Poverty Level (which will change frequently).
A key feature of ABLE accounts is that the first $100,000 in an account is not treated as personal assets of the account's beneficiary. This is important because federal law generally bars individuals from receiving assistance such as Medicaid, housing aid and Supplemental Security Income if they have more than $2,000 worth of financial assets. For ABLE accounts that exceed $100,000 your child will see their SSI benefit reduced or eliminated. If and when the ABLE Account exceeds $100,000, the SSI benefit payment would be suspended until the account falls back below $100,000. As a result, you should be careful of putting too much in each year. Keep in mind that your eligibility for SSI is suspended they will still be eligible to receive Medicaid, so this becomes a decision point for families.
Another downside of an ABLE account is that upon the death of the beneficiary the state in which the beneficiary lived may file a claim for all or a portion of the funds in the account equal to the amount in which the state spent on them through the state Medicaid program. This is known as a “Medicaid Pay-Back” provision and is a similar to how the states treat a first party special needs trust. Over funding then can put much of the savings at risk. Having a good estimate of yearly expenses tied to a savings plan is important in balancing the needs of the individual with retaining the flexibility of funding. See a financial planner to develop a proper savings plan.
Like the 529 college savings plans, ABLE accounts are administered at the state level but you don't have to open one in your home state and are free to shop around. However, some states do offer state income tax incentives to residents. If your state does, you may want to take a look at your state's plan first.
Contributions to an ABLE account are not tax-deductible. Rather, all investment earnings and interest remain tax-free as long as money taken from the account is used for "qualified disability expenses." What is a qualifying disability expense? Good question. The National ABLE resource center has a nice video that lays them out. They include medical treatments, education, tutoring and job training, special-needs transportation, assistive technology, housing, and legal and administrative fees among others.
Just like 529 plans, taxes apply if money is withdrawn from an ABLE account for something other than qualifying expenses. Usually, the beneficiary will have to pay income taxes on the portion of the withdrawal that consists of investment earnings, as opposed to contributions, PLUS pay a 10% tax penalty. This is a sizable hit on the earnings, so ensure you know what qualifies as a disability expense. This is another reason over funding an ABLE account can be problematic.
Investment Options and Fees
Because ABLE accounts are managed at the state level, different states have partnered with different investment firms to provide the investment management of account assets. Investment options and fees will vary by state, so it pays to compare. The ABLE National Resource Center has a handy tool to compare each of the different states plans and fee structures.
For example, my state of Colorado has the Colorado ABLE. They use Blackrock, Schwab, and Vanguard for their investments; all well-known firms. Like a 529, ABLE accounts typically offer up a mix of asset allocations. Based on your risk tolerance and timeline, you can select a mix of stock funds and bond funds that make sense for the beneficiary. For the Colorado ABLE, the Aggressive Option has a mix of 90% stocks and 10% bonds, whereas the Growth Option has a mix of 60% stocks and 40% bonds, and the Conservative Option maintains only 10% stocks, 30% bonds, and 60% cash. You are free to choose the option that meets your risk tolerance and change when you feel necessary. If you child is young, you may want to pursue the Aggressive Option in order to build up your assets. Once your child hits adulthood, preservation is probably a bigger consideration and you may want to pick a more conservative allocation.
Fees vary by state as well. For Colorado ABLE, the account charges an annual management fee of $45 (or $60 if you opt for paper statements). Furthermore, the annualized investment costs range from 0.34% to 0.38% of your invested assets depending on which firm you go with. If you managed to save $100,000 in your child's ABLE account you would pay approximately $340 in management fees each year plus $45 in account management fees for a total of $385. This is actually a pretty reasonable fee and is consistent to the fee structure found in many index funds and 529 plans.
Similarities to the 529
Many disabilities aren’t diagnosed immediately at birth and families that had saved into a 529 College Savings Plan and later discovered their child had special needs may have to choose between withdrawing the funds and paying taxes and a penalty or rolling the funds over to another beneficiary all-together to be used for their education. Fortunately the new tax act allows for money in 529 plans to be rolled into ABLE Act accounts without having to pay taxes on the gain or a penalty.
This is a huge benefit to families who saved for higher education expenses before they knew the extent of their family member’s disability. State rules differ from the federal rules on whether or not the rollover will be taxed so you will want to check with your state on impacts. Keep in mind your annual limit of $15,000 still applies to 529 rollovers.
Special Needs Alliance has a nice article cautioning the use of 529 rollovers. If you are thinking about a rollover, you may want to check it out here.
Role of a Special Needs Trust (SNT)
An ABLE account will generally provide more options and control than a SNT. Additionally, the cost of establishing an ABLE account will likely be significantly less than a SNT. With an ABLE account, account owners will have the ability to control their funds and, if circumstances change, still have other options available to them. Once a SNT is funded, those funds are locked and the trust become irrevocable.
The SNT is still very important and has a significant advantage over an ABLE account. While ABLE accounts incur a reduction in SSI at $100,000 and are typically capped at $300,000 to $400,000 depending on your state. Unlike the upper cap on an ABLE account, there is no upper limit to the contributions that can be made to a SNT and there is no subsequent reduction in benefits. More importantly, a third party SNT isn't subject to Medicaid payback like the ABLE.
However, I would caution looking at it as a simple choice between an ABLE account or SNT. Rather, there is a role for both accounts, and proper special needs planning will pursue both options concurrently. Parents should treat savings for an ABLE account the same they would with savings for college for other children. The ABLE will provide flexibility as the child moves into teenage years or adulthood. It is their near-term living account. The SNT is then structured as a bucket to catch your estate so your retirement funds, property, insurance payouts, etc are directed to the SNT and serve as the long-term funding for your child's future.
Open an Account
So have I convinced you? You're an astute investor and you know the importance of the time value of money. You will want to set up an account as early as you can. Don't worry about your plans to move in the future. Remember, you can open an account in any state and you are allowed to transfer it once a year. Go ahead and get started.