Skip to content

An introduction to the ABLE Act of 2014 and ABLE accounts – how they work and why they’re important.

  • Key Takeaways
    The ABLE Act creates state-sponsored, tax-free savings accounts for disability-related expenses.
  • The state-sponsored programs enable individuals with disabilities, as defined under IRC Section 529A, to save without affecting their eligibility for Social Security, Medicaid or other important public benefits.
  • Each state is responsible for establishing and operating an ABLE program.

What is the ABLE Act?
The ABLE Act – formally, the Stephen Beck Jr. Achieving a Better Life Experience Act of 2014 – was created to give individuals with disabilities and their families the opportunity to save for the future without limiting access to critical income, healthcare, food or housing assistance programs.

Before the bill was introduced, eligibility for these programs was limited to individuals who reported no more than $2,000 in cash savings, retirement funds or other substantial items of value. With the ABLE Act, they’ve made great strides.

The act amends Section 529 to create a tax-free savings account, similar to 529 college savings plans, that enables individuals to save without affecting their eligibility for Social Security Income, Medicare or similar programs.1 Contributions to the account are not tax deductible, but funds can grow tax-deferred inside the account and distributions made to cover “qualified disability expenses” – including medical and dental care, education and training, housing, and transportation – are tax-free.

Who is Eligible?
Individuals are eligible for ABLE accounts if they:

  • Are entitled to Social Security Act benefits based on blindness or disability that occurred prior to age 26, or
  • File a disability certificate with the IRS for the tax year. The certification must state that the individual is blind or has a physical or mental impairment that results in severe functional limitations. This impairment must have occurred before the age of 26 and must have lasted or be expected to last for at least 12-months2 or can be expected to result in death.

The ABLE account owner must be the qualified individual and the account beneficiary. Each eligible individual can only have one account.

Who Contributes?
Anyone can contribute to an ABLE account. Generally, contributions may not exceed the amount of the annual gift tax exclusion for that tax year. For 2017, that amount is $14,000 and may be adjusted annually for inflation. 3However, each plan has a maximum contribution or limit2, and regulations specify that any amount contributed in excess of the annual gift tax exclusion must be returned to the contributor. As with 529 plans, some states may offer a state income tax benefit for using the individual’s home state plan.

Rules for Distribution
As noted earlier, distributions from an ABLE account are tax-free if the money is used to pay for qualified disability expenses. Any amounts distributed in excess of those used to cover qualified expenses must be included in the individual’s taxable income and will be subject to a 10% penalty. The 10% penalty will not apply if the distribution is on or after the death of the account beneficiary.

State Implementation
While the ABLE Act has passed at the federal level, it is up to the states to pass their own ABLE bills. If it does not offer its own program, a state may choose to contract with another state to offer its eligible individuals the opportunity to open ABLE accounts. The new Protecting Americans against Tax Hikes (PATH) Act passed in December 2015 allows consumers to select a plan sponsored by any state, making it possible for people to select a plan that is best suited to their needs.

Keep in Mind
When it comes to addressing the long-term cost of living with a disability, ABLE accounts do have some limitations, including restrictions on the size of contributions and the Medicaid payback provision.4 So, ABLE accounts may be a good supplement, but not necessarily a replacement, to a special needs trust.

Please note, ABLE plans are not currently available through financial advisors and can only be purchased directly through the state. However, your financial advisor can help provide more information on ABLE accounts and other ways to plan for a loved one’s long-term needs.

Able Act of 2014
ABLE Act of 2014

1ABLE account balances over $100,000 are counted in means or resource tests and may result in the suspension of eligibility for Social Security Income benefits during any period in which the excess remains in the ABLE account. 2Dependent on legislation of the state in which the account is established.3There is no opportunity for five-year forwarding for gift tax purposes.4If the beneficiary’s resident state paid for the beneficiary’s Medicaid costs incurred after the account was opened, that state receives reimbursement of the balance of the account upon the beneficiary’s death.The information contained within this document has been obtained from sources considered reliable, but Raymond James does not guarantee the foregoing material is accurate or complete. You should discuss any tax or legal matters with the appropriate professional.

Additional information is available on request. This document may not be reprinted without permission.Raymond James & Associates may make a market in stocks mentioned in this report and may have managed/co-managed a public/follow-on offering of these shares or otherwise provided investment banking services to companies mentioned in this report in the past three years.RJ&A or its officers, employees, or affiliates may 1) currently own shares, options, rights or warrants and/or 2) execute transactions in the securities mentioned in this report that may or may not be consistent with this report’s conclusions.The opinions offered by Mr. Saut should be considered a part of your overall decision-making process. For more information about this report – to discuss how this outlook may affect your personal situation and/or to learn how this insight may be incorporated into your investment strategy – please contact your Raymond James Financial Advisor.All expressions of opinion reflect the judgment of the Equity Research Department of Raymond James & Associates at this time and are subject to change. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. Other Raymond James departments may have information that is not available to the Equity Research Department about companies mentioned. We may, from time to time, have a position in the securities mentioned and may execute transactions that may not be consistent with this presentation’s conclusions. We may perform investment banking or other services for, or solicit investment banking business from, any company mentioned. Investments mentioned are subject to availability and market conditions. All yields represent past performance and may not be indicative of future results. Raymond James & Associates, Raymond James Financial Services and Raymond James Ltd. are wholly-owned subsidiaries of Raymond James Financial.International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.Investors should consider the investment objectives, risks, and charges and expenses of mutual funds carefully before investing. The prospectus contains this and other information about mutual funds. The prospectus is available from your financial advisor and should be read carefully before investing.

Leave a Comment