Understanding ABLE Accounts and Investment Options
What are ABLE Accounts?
The ABLE Act, which was signed into law in December 2014, allows Americans living with disabilities to save money in a tax-deferred account as a supplement to private insurance and public benefits. ABLE Accounts are tax-advantaged investment accounts that help qualified individuals with disabilities, and their families, save for disability-related expenses.
Who can Contribute?
Anyone can contribute to an individual’s ABLE account. There is a combined contribution limit not to exceed $15,000 in the 2020 tax year.1 Additionally, the account's funds are not considered when determining eligibility for means-tested federally-funded benefits such as Supplemental Security Income (SSI) and Medicaid. It is also important to note that a person can only be the beneficiary of one ABLE account.
Who is eligible to open an ABLE account?
The ABLE Act limits eligibility to individuals with significant disabilities with an age of onset of disability before turning 26 years of age.1. If you meet this age criterion and are already receiving benefits under SSI and/or SSDI, you will automatically establish an ABLE account. If you are not a recipient of SSI and/or SSDI but still meet the age of onset disability requirement, you could still be eligible to open an ABLE account if you meet Social Security’s definition and criteria regarding significant functional limitations and receive a letter of certification from a licensed physician. You need not be under the age of 26 to be eligible for an ABLE account. You could be over the age of 26 but must have had an age of onset before your 26th birthday.
What can the funds in the ABLE account be used for?
Funds in the account can be used to purchase qualified disability-related expenses. A qualified disability expense is any expense related to the designated beneficiary’s blindness or disability that helps him/her increase and/or maintain their health, independence, and/or quality of life.1 These may include education, housing, transportation, employment training and support, assistive technology, personal support services, health care expenses, financial management and administrative services, and other expenses.
What are the best ABLE accounts?
I did an in-depth analysis of ABLE accounts for over 40 states that currently offer these plans using a comparison tool provided by the ABLE National Resource Center.2 Using 11 factors, I found the following states had low (or no cost) plans to open and maintain and provide high-quality investment options. From the analysis, I found the Top Three States that had at least 8 of the 11 factors: Virginia, Massachusetts, and Ohio.
Many other state plans were good options with low-cost ETFs such as Vanguard. One issue with many of the investment accounts is that they did not have a wide variety of investment options, typically five or sometimes fewer funds. Almost all were FDIC insured up to $250,000. In many states, you can choose another state’s plan. You are not necessarily restricted to your state plan, but you would want to consider your state's plan more carefully if it allows for a state income tax deduction.
How to Choose the Right Investment Option?
When choosing a plan, it is best to find one that gives you enough investment choices and low maintenance cost. Low-cost ETFs are the best options for many investors. When choosing investments, you should also look at your risk tolerance. More conservative investors would have more bonds in their investment portfolios. An investor who wants to take on more risk, and perhaps greater return, would have more stocks in their portfolio. Talk to a financial planner to discuss ABLE accounts and investment choices that are right for your unique situation.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on to avoid any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.