What Is an ABLE Account?

ABLE accounts allow individuals with disabilities to save money using a tax-advantaged account. These accounts were created as part of the Achieving a Better Life Experience Act (ABLE) of 2014. This law was established to help make it easier for those with disabilities to cover qualified expenses. But before you consider opening an ABLE account, you’ll want to understand how they work and who’s eligible for them. You can also work with a financial advisor as you develop a financial planning strategy for you and your family.

An ABLE account is a tax-advantaged savings program for eligible people with disabilities, known as designated beneficiaries. Money saved in an ABLE account can be used by a designated beneficiary to help pay for qualified disability expenses. Any funds withdrawn from the account are tax-free when used for qualified expenses, similar to the way funds in a 529 plan can be withdrawn tax-free when used for higher education.

The Tax Cuts and Jobs Act of 2017 expanded some of the provisions of the original ABLE Act. That included:

Increasing contribution limits to ABLE accounts
Allowing the designated beneficiary of an ABLE account to claim the saver’s credit for their contributions
Permitting rollovers from a 529 qualified tuition program to an ABLE account (when the designated beneficiary of both accounts is the same person)

An ABLE account is not specifically a retirement savings account. Instead, it’s designed to make the financial burden of paying for expenses related to disability easier to bear while offering some tax benefits to savers.

How an ABLE Account Works

An ABLE account works by allowing a designated beneficiary to save money for disability expenses on a tax-advantaged basis. Designated beneficiaries are allowed one ABLE account but anyone may contribute to the account on behalf of the beneficiary. Contributions made by someone else are subject to the annual gift tax exclusion limit, which is $16,000 for individuals and $32,000 for married couples filing a joint return. Again, this is largely similar to the way a 529 plan works.

Money in the account grows on a tax-deferred basis. Withdrawals are tax-free when used for qualified disability expenses. This includes costs related to:

Education
Housing
Transportation
Employment training and support
Health, prevention and wellness
Assistive technology and related services
Financial management services
Legal fees
Everyday living expenses

An ABLE account can also be used to pay for funeral and burial expenses after the designated beneficiary passes away. Rollovers to an ABLE account from a 529 plan are allowed on behalf of the designated beneficiary or his or her family member. The rollover amount is limited to $16,000 for 2022.

Who Qualifies for an ABLE Account?

ABLE accounts have one designated beneficiary who owns the account. In order to own an ABLE account, one of the following must be true:

You’re eligible for Supplemental Security Income (SSI) due to a disability or blindness that began before age 26
You’re eligible to receive disability insurance benefits, childhood disability benefits or disabled widow’s or widower’s benefits based on disability or blindness that began before age 26
You’ve certified or had a parent or guardian certify that you met the criteria for disability certified before age 26

Parents can establish ABLE accounts on behalf of disabled children or adults can do so for themselves. Any distributions from the account are intended to be used only for the benefit of the designated beneficiary. If the designated beneficiary is unable to make withdrawals on their own behalf or is a minor, someone with signature authority (i.e. a parent or guardian) can assume control of the account for them.

Tax Benefits and Contribution Limits of ABLE Accounts

The main tax benefit associated with ABLE accounts is the ability to withdraw money on a tax-free basis when that money is used for qualified disability expenses. You can, however, run into tax trouble if you use money in the account for a non-qualified expense. The IRS can assess income tax on any earnings withdrawn and apply a 10% withdrawal penalty.

In terms of contributions, the annual contribution limit follows the annual gift tax exclusion limit. So again, the 2022 limits are $16,000 for individuals and $32,000 for married couples who file a joint return. ABLE account owners who are working may be able to contribute additional funds above this limit. The amount they can contribute can’t exceed federal poverty level thresholds for a one-person household or the designated beneficiary’s gross wages for the taxable year, whichever is less.

It’s important to note that funds in ABLE accounts will not affect the designated beneficiary’s eligibility for SSI, Medicaid or other public benefit programs, up to a certain limit. Once the balance reaches $100,000 those benefits can be suspended. If the account balance dips back below the $100,000 limit, then benefits can be reinstated.

How to Open an ABLE Account

It’s possible to open an ABLE account online with as little as $25 to $50. Each state maintains an ABLE website for its plan, though you don’t have to live in any particular state in order to open an account there. You can choose the plan that looks most attractive to you.

When opening an ABLE account, consider the investment options offered, which may include mutual funds and exchange-traded funds (ETFs). The range of investment options can vary from plan to plan. Also, look at whether any tax deduction may be available for contributions.

The majority of states do not allow you to deduct contributions but a handful do offer some type of tax benefit. There’s no federal tax deduction for contributions. In addition to investment options, take the fees you might pay into account. Mutual funds and exchange-traded funds can both charge expense ratios, which represent the annual cost of owning the fund. The higher these fees are, the more they can detract from your investment returns.

Bottom Line

Understanding what is an ABLE account is important if you have a disability or a disabled family member. These accounts are designed to make it easier to pay for qualified expenses while still allowing disabled persons to receive government benefits or work if they’re capable of doing so. That can be invaluable for managing the cost of care over a lifetime.

Financial Planning Tips

Consider talking to a financial advisor about whether an ABLE account might be something you need, either for yourself or a disabled family member. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you have a disabled dependent, you may also consider establishing a special needs trust on their behalf. A special needs trust is designed to hold money and other assets that are to be used to pay for the care of a special needs dependent. Setting up this type of trust can also allow a disabled dependent to remain eligible for SSI benefits, Medicaid and other government benefit programs.