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ABLE savings accounts for people with disabilities

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ABLE Savings Accounts for People With Disabilities

Al Waller: We’re back with another edition of ClearPath – Your Roadmap to Health & Wealth SM. I’m your host, Al Waller.

Today, we’re here to discuss an important tax-advantaged savings program for eligible individuals with disabilities, known as ABLE accounts. According to the ABLE National Resource Center, only slightly more than 100,000 ABLE accounts were opened as of September 2021. This is an extremely small number considering there are an estimated 8 million people eligible for this savings program. Given the staggering number of people who could potentially benefit from ABLE accounts, I’m guessing there is probably just a lack of general awareness about them.

Catherine Collinson, president of nonprofit Transamerica Institute® and its Transamerica Center for Retirement Studies, is with me today to provide an overview of ABLE accounts, so we can all help spread the word about them.

First off – Catherine, welcome back! Now could you unpack all of this for us by explaining what are ABLE accounts?

Catherine Collinson: Absolutely Al, thank you! It's great to be back.

ABLE accounts are tax-advantaged savings accounts to help eligible individuals with disabilities and their families to save money in a tax-exempt account for disability-related expenses. The accounts were established back in December of 2014 when Congress passed the Stephen Beck, Jr. Achieving a Better Life Experience or ABLE Act. The law was named for Stephen Beck, a self-trained, unpaid lobbyist and father, who advocated for the ABLE Act to help his own daughter and millions of Americans with disabilities. Sadly, he passed away unexpectedly shortly before the passing of the law.

Al Waller: Well nevertheless, that's quite an achievement and a legacy to leave behind. Now, Prior to the creation of ABLE accounts, disabled Americans actually risked losing government benefits any time they saved over $2,000 in their own name. And it’s also important to note, assets in ABLE accounts aren’t taken into consideration for eligibility for federally funded benefits, such as Supplemental Security Income (SSI) and Medicaid.

Catherine Collinson: Yes, indeed. The ability for disabled Americans to accumulate savings is the foundation of these accounts – and that is accumulate savings without jeopardizing their benefits.

Just imagine being the parent of an adult child with Down Syndrome who receives important Federal benefits – and a child who has a job that they love and brings them satisfaction. Your child may need to incur some expenses such as specialized job training and periodic coaching. The assets or savings in this child's ABLE account can help cover those expenses without the risk of losing their federal benefits. And of course, I want to highlight ABLE accounts can be used to cover a whole wide range of other types of expenses as well.

Al Waller: I see. So then, who is eligible and could or should be taking advantage of an ABLE account?

Catherine Collinson: Eligibility for ABLE accounts is limited to individuals who have become disabled before their 26th birthday. Eligibility for the accounts follows the Social Security Administration’s definition of “disabled,” which is the inability to engage in substantial, gainful activity by reason of any medically determinable physical or mental impairment(s) which can be expected to result in death, or which has lasted or can be expected to last for a continued period of one or more years.

I know this is all really technical, but I think it's important because this definition is really meaningful for people who have disabilities to be able to have savings above and beyond the $2,000 that you referenced.

So, if somebody meets this age 26 age requirement and is currently receiving benefits under the Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI), they're automatically eligible to open an ABLE account. If they meet these criteria but are not getting SSI or SSDI, they can apply through the Social Security Administration.

And one thing I think is really important to highlight because I myself was confused with this – the account can be opened at any point in the person's lifetime. They have to become disabled before their 26th birthday but they could be over 26 and still open an account or have their family open an account and name them as the beneficiary.

Al Waller: I follow you there. You mentioned that ABLE accounts are tax-advantaged savings accounts. Could you walk us through some of the tax benefits associated with them?

Catherine Collinson: Great question, Al. Let me break it down.

Contributions to an ABLE account are not tax-deductible, but all of the investment earnings are untaxed over the growth of the account over time. And money withdrawn from the account for "qualified disability expenses" are not taxed.

In other words, hypothetically speaking, you have a child or a beneficiary that you are making a donation into that account – that account can grow over time and when the beneficiary or the person who the account is in the name of takes a withdrawal from that account for various types of expenses, those withdrawals are tax-free.

Al Waller: How are the accounts funded and would there be any restrictions on that funding?

Catherine Collinson: The good news is that anyone – the individual (also known as the beneficiary) or their family or friends – can contribute to the individual’s ABLE account.

Under most circumstances, the total maximum annual contributions into the account from all sources – family, friends, the beneficiary – the annual maximum that can be contributed to the account is $16,000 in 2022, which is up from $15,000 in 2021. That sounds like a really sizable annual contribution limit. But I also want to point out that in addition to this annual contribution limit, there's a couple of other limits to consider.

First of all, ABLE accounts are subject to a lifetime maximum, which varies by the state of issuance. So, do your homework when choosing which state's ABLE account program is best for you.

Secondly, irrespective of the state's lifetime maximum, account holders should be aware that their Social Security Insurance benefits or SSI benefits stop when the assets in the ABLE account are in excess of $100,000 combined with other assets exceeding $2,000. So, you can build up savings in the ABLE accounts, but you really do not want to get to $100,000. If you get there, it will suspend your SSI benefits.

So, that's something really important to keep in mind.

Al Waller: I understand that there may also be a wage-based component. How does that work?

Catherine Collinson: If the ABLE account holder is employed, and their employer does not contribute to a workplace retirement plan for them, that individual can contribute part or all of their income to the ABLE account, up to the federal poverty-line amount for a one-person household ($12,880 for 2021 in the continental U.S.). This is in addition to the $16,000 maximum, which I referred to.

If we think about this, this is a really neat opportunity. So, the ABLE account holder is able to hold down a job, and they can contribute their earnings to the account – which is really empowering for them to be able to do so – assuming that they have other ways to ensure that their needs are met – for example, if they're living at home with their family.

Al Waller: That's really good to hear and correct me if I'm wrong. But I think you mentioned funds in ABLE accounts are for “disability related expenses”. So, does this mean that the money can only be spent on certain things? How limited are we talking here?

Catherine Collinson: It does. There are some limitations. However, what I think is super encouraging is the definition of “qualified disability expenses” is extremely broad. For example, individuals can spend their ABLE account funds on expenses ranging from housing, transportation, employment training, and other expenses – which can improve their health Independence or overall quality of life. And as I mentioned before, withdrawals – or what the IRS refers to as distributions – are tax-free when they meet these criteria.

ABLE accounts were established to be a cost effective and straightforward savings vehicle. For some people, there are more complex tools that are also available, specifically Special Needs Trusts, and these tools might be appropriate. I am happy to share some good news is that these tools are not mutually exclusive. An individual could have an ABLE account in addition to a Special Needs Trust.

Al Waller: Sounds like there's a fair amount of room to maneuver here. So, how does one sign up for an ABLE account – and any chance there's a one-stop option available?

Catherine Collinson: There is not a one-stop option available for ABLE accounts. However, there is a nonprofit organization called the ABLE National Resource Center, which provides extensive information. A little background… ABLE accounts are part of the 529 tax code, which you may have heard of because they're often referred to as a big part of the college savings programs. So ABLE accounts are part of the 529 tax code, and like those college savings programs – which are actually quite popular, and many are aware of – the ABLE programs are established by the states.

At this point in time, more than forty states offer them, and you do NOT have to use the program offered by the state you live in. It's also a really important, recurring theme on this show – do your homework. It's wise to compare programs and their specific services, investment options, and fees between states. So, do your homework.

The ABLE National Resource Center has information about all these programs and even has a tool for comparing the different state's offerings. So again, it is the ABLE National Resource Center and their website is www.ablenrc.org.

Al Waller: Sounds like a lot of options to consider. What are some other important things our listeners might need to know?

Catherine Collinson: There's one other tax thing that I didn't get to earlier that I want to point out and that is the Saver’s Credit. The Saver’s Credit is a tax credit for eligible tax filers who are saving for retirement in a qualified plan or in an ABLE account.

For disabled individuals who are making contributions to their own ABLE account, they could be eligible to claim this valuable tax credit in doing so. That's actually an added reason to consider an ABLE account – that you could also benefit from a tax credit for contributing.

Another thing I wanted to point out before we sign off, Al, has to do with the 26th birthday. This is something to keep your eyes on. There's some public policy discussion about it and that would be the possibility of raising the age for people who become disabled later in life.

There is proposed legislation that would raise the eligibility to age 46. Then there's a different piece of legislation that would permit employers to contribute to an employee's ABLE account in lieu of a retirement plan. Both of these proposals could help many more disabled Americans save for their future.

Al Waller: Well, given the need that currently exists – perhaps and hopefully, that legislation will come to pass. To that point, we encourage our listeners to share information about these accounts to those who can benefit from them.

ClearPath – Your Roadmap to Health & Wealth is brought to you by Transamerica Institute, a nonprofit private foundation dedicated to identifying, researching, and educating the public about retirement security and the intersections of health and financial well-being. You can find our weekly podcast on WYPR’s Podcast Central and mobile app, wherever you get your podcasts, and at transamericainstitute.org.

We hope you join us and listen to more episodes, including our recent episode explaining the Saver’s Credit.

I’m your host Al Waller. Until the next time, stay safe, be well and thanks for listening.

Clearpath is produced by Transamerica Institute with assistance from WYPR.

Al Waller is a long-time Baltimore native and employment expert with a 30-year career in leading and advising locally and globally based corporations on matters including: Talent Acquisition and Retention, Employee Relations, Training and Development.
Catherine Collinson is the founding president and CEO of nonprofit Transamerica Institute and its Transamerica Center for Retirement Studies, and she is a champion for Americans who are at risk of not achieving a financially secure retirement. With two decades of retirement industry-related experience, Catherine is a nationally recognized voice on workforce, aging, and retirement trends. She was named a 2018 Influencer in Aging by PBS’ Next Avenue. In 2016, she was honored with a Hero Award from Women’s Institute for a Secure Retirement (WISER) for her tireless efforts in helping improve retirement security among women.