Definition and Examples of an ABLE Account
An investment account for people who have the onset of a disability prior to age 26, the ABLE account offers individuals and parents of children with developmental disabilities who receive Social Security income a measure of financial stability in the form of a tax-advantaged savings account protected from Medicaid Estate Recovery asset seizures.
A limit of $100,000 of income saved or earned in an ABLE account gets protection from Medicaid asset seizure.
To be eligible for an ABLE account, the disability must have been identified by age 26, as mentioned, and the recipient must be receiving Supplemental Security Income (SSI) and/or Social Security Disability Insurance (SSDI). If both of those requirements are met, then you can be automatically enrolled in an ABLE account.
Contributions made to an ABLE account by individuals or parents of disabled children are made with after-tax money and are capped at $15,000 a year, which is the maximum amount allowed as a gift by the IRS before gift recipients would need to pay tax on it. Account limits vary from state to state, but among them, the most an ABLE account holder can have on deposit is $529,000. Income earned on the accounts is not taxed.
History of the ABLE Account
The ABLE account was created in 2014 with the passage of The Achieving a Better Life Experience (ABLE) Act. The act allows states to create accounts for persons with an established disability as a way to pay for qualified disability expenses with tax-free distributions.
“The reason they exist is to protect assets from Medicaid,” Tami Mitchell, founder of Disabled Girl on FIRE, told The Balance by video call.
“ABLE accounts were designed for parents of developmentally disabled children, to prevent them from losing all of the support that they have when the parents passed,” Mitchell said.
“They may receive some sort of inheritance because their parents died. They could lose the housing that they've lived in for maybe 10 to 20 years. The caregiving support that they received could all be gone because they received this influx of money, and that would have to all be spent,” she said.
To keep Medicaid from seizing the house, the rules dictate that the disabled adult cannot have any other assets from which they could pay for care not covered by insurance, Medicare, or Medicaid. Individuals who depend on SSI/SSDI are restricted to a maximum of $2,000 in liquid resources. The ABLE account was introduced as a way to save for more costly expenses, such as affordable housing or assistive technology.
“So $100,000 is protected from Medicaid and allows them to increase their quality of life, maybe get some extra care support, get the medical supplies, things like supplements or caregiving that the state doesn't say they need, but they do,” Mitchell said.
“Imagine your child needs a new wheelchair. Those are tens of thousands of dollars, depending on the type that they are, but parents are not allowed to save more than $2,000. How do you make sure that when you pass, your child has access to the things they need?” Mitchell said.
The ABLE account is set up in the child’s name, so the account belongs to the child, and the parents don’t have to worry about Medicaid seizing an inheritance the parents might attempt to leave their child to pay for ongoing care.
How an ABLE Account Works
Currently, to be eligible for an ABLE account, you must be diagnosed or self-certify with a disability by the age of 26. If you meet the age requirement and are receiving SSI or SSDI, then you are automatically eligible to open an ABLE account.
Either the disabled person or someone acting on their behalf can make contributions to the account of up to $15,000 a year. Although those contributions are not tax-deductible and must be made with after-tax dollars, earnings from investments in an ABLE account are tax-free.
“It's really the only way that you can access any monetary gains,” Mitchell said. “Especially if you're involved in SSI or Medicaid, you don't qualify for any of those services until you spend everything you have. If you have a 401(k) or an IRA [individual retirement account]...if you have any assets at all, they have to be gone before you qualify for any services.”
The $100,000 protected from Medicaid does not include the $2,000 resource limit. ABLE account holders are able to access the funds in their accounts via a debit card, for which there may be a monthly fee.
Even if the state where the disabled person lives has not established an ABLE program, he or she is free to enroll in any state’s program, provided that it’s accepting out-of-state residents. You can determine which state ABLE programs are taking non-residents.
Although the stipulations may seem complicated, an ABLE account provides some measure of financial stability for individuals identified by age 26 as having a disability.
Due to resource restrictions imposed on people who depend on Medicaid services, many individuals who receive SSI/SSDI live at or below the poverty line. An ABLE account allows for a more robust source of funds that individuals can use to pay for items related to their disabilities that improve their quality of life.
- To qualify for an ABLE account, an individual must be diagnosed or identified with a disability by age 26.
- Contributions of post-tax dollars are capped at $15,000 per year.
- Income earned on investments in an ABLE account is tax-free.
- A limit of $100,000 of income saved or earned in an ABLE account gets protection from Medicaid asset seizure.