If you have a loved one with disabilities, you may be familiar with “ABLE” accounts, authorized by Congress in 2014 under the Achieving a Better Life Experience Act. ABLE accounts are tax-advantaged savings accounts–similar to 529 education savings plans–whose funds can be used to pay for certain qualifying expenses of disabled individuals. As a result of the Tax Cuts and Jobs Act (TCJA), there are several changes that affect ABLE accounts.
What You Should Know
First, a 529 account can now be rolled over to an ABLE account. However, the ABLE account must be for the same beneficiary as the 529 account or for a member of the same family. Previously, families who originally funded a 529 account for a child whose disability manifested later in life would suffer a tax penalty if the funds were withdrawn from the 529 account to cover medical expenses because they were not allowable education expenses. Now those same funds, through the use of the rollover, can be made available for the beneficiary's disability-related expenses. There are limits as to how much can be rolled over, so it is important to discuss any changes to a 529 plan with your tax professional.
Second, a beneficiary of an ABLE account can now contribute their personal earned income into their own account. The maximum amount a beneficiary can contribute is equal to the annual federal poverty level for a one-person home ($12,490.00 in 2019 in the continental United States and the District of Columbia). These contributions, however, are separate and apart from contributions made to the ABLE account by other individuals (family members, friends, estates, trusts, etc.). Further, a working beneficiary will not be eligible to contribute their own money to the ABLE account if their employer contributes to a workplace retirement plan on his or her behalf.
Third, those beneficiaries who contribute to their own ABLE account, as opposed to others who contribute to the account, may be eligible for the Saver's Credit. Up to $2,000 of the contributions made by ABLE account beneficiaries may be eligible for this credit. This may help lower any income tax owed by the beneficiary or help increase any refund the beneficiary may be entitled to. There are, however, additional requirements that need to be met and it is important to check with an experienced professional to determine what credits may be available for a beneficiary who contributes to their own account.
Know Your Options
It is important to know that ABLE accounts, as well as special needs trusts, have an underlying purpose: to supplement, not replace, the benefits and services provided by government programs like Medicaid and Supplemental Security Income (SSI). If you have a loved one with special needs, contact us to help guide you through the process of creating a plan that best suits your family's needs.