An Achieving a Better Life Experience (ABLE) account provides a tax-advantaged method to save for qualified disability-related expenses. Contributions are not tax deductible for federal income tax purposes, but your investments can grow tax free & remain so when withdrawn & used for qualified disability-related expenses. Qualified disability-related expenses are expenses related to the account owner’s disability or blindness, & that are used to maintain or improve their “health, independence, or quality of life.” Qualified disability-related expenses are broadly defined & may include expenses related to education, food, housing, transportation, employment training & support, assistive technology, personal support services, health care expenses, financial management & administrative services & other expenses.
Similar to 529 college-savings plans, ABLE programs are administered by the states. Most states have established ABLE programs, & many ABLE programs are open to both in-state residents & out-of-state residents.
As with 529 plans, you can typically choose among several investment options with an ABLE account, which often include mutual funds & money market funds. You may also be able to allocate funds to savings or checking options & access account funds via checks or ATMs. It is important to understand your goals & expected uses for the money you have in an ABLE account when making your investment choices.
Are you eligible?
While an individual of any age may own an ABLE account, the beneficiary of the account–the account owner–must have incurred a qualifying blindness or disability before becoming 26 years old. Beginning in 2026, the age of disability onset will change from 26 to 46 years old.
Who can open an account?
An eligible individual who is 18 years or older may open an ABLE account or select someone to assist them in opening the account. If an eligible individual is a minor or an adult without the legal capacity to enter into contracts, the ABLE account must be opened by one of the following individuals in order of priority:
- Agent under power of attorney;
- Legal guardian or conservator;
- Grandparent; or
- Representative payee.
How much can you contribute?
Annual contributions to a single ABLE account are limited to the annual gift tax exclusion (currently $17,000 for 2023). If an ABLE account owner works, & no contributions are made to an employer’s retirement plan, an ABLE account owner may also contribute additional money beyond the annual contribution limit. These ABLE account owners may contribute an additional amount to the ABLE account equal to the lesser of their annual compensation or the Federal Poverty Level for a one-person household in their state of residence for the prior year (which for 2023, would be $13,590 in the continental US, $16,990 in Alaska, & $15,630 in Hawaii).
ABLE accounts are also subject to the same aggregate limit that applies to their state’s 529 plan. The account may no longer accept contributions once the account value reaches this aggregate limit. However, if the account value falls below the limit, contributions may resume, subject to the same limit. These aggregate limits vary from state to state – for more information on these limits, check out the ABLE National Resource Center’s ABLE account search tool.
ABLE account owners may also be eligible for a Federal Saver’s Credit for contributions into their ABLE account. For additional information on this credit please consult a tax professional or carefully review information about the credit on the Internal Revenue Service’s website.
How should you allocate funds?
You should carefully consider your investment selections, taking into account your goals & how you expect to use the money. Under current federal law, an account owner is only permitted to change his or her investment selections twice per year. Keep in mind when allocating your investments how soon you will need the funds, as riskier investment options may not have time to recover losses if you need the invested funds sooner, rather than later.
For example, if you plan to use the money for current expenses or for a short-term goal, it may be prudent to choose less risky investments. Putting your money in a checking or savings option guarantees it’s all there for your current expenses or short-term goals.
On the other hand, if you are planning to save for a longer term, you may want to consider investment products that may provide higher returns in the long run than, for example, a basic savings option. However, with the possibility of higher returns comes the exposure to higher risks & the possibility of losing money. As you get closer to your investment goal, you may want to change your asset allocation to take on less risk.
What fees & expenses will you pay?
It is important to understand the fees & expenses associated with an ABLE account because they may lower your investment returns. ABLE programs may charge account maintenance & service fees. Some state plans will waive or reduce some of these fees if you maintain a specified account balance, choose electronic delivery of statements, or reside in the state sponsoring the ABLE account.
You may also be charged asset management fees. In addition, each investment option will also generally have fees & expenses associated with the mutual funds & other underlying investments in which it invests. You should carefully review the fees of the underlying investments because they are likely to be different for each investment option. Fees are included in each state plan disclosure document.
How does an ABLE account affect federal & state income taxes?
Investing in an ABLE account offers special tax benefits. Earnings in an ABLE account are not subject to federal income tax or state income tax if the withdrawals are used for qualified disability-related expenses. However, if you withdraw money from an ABLE account & do not use it on a qualified disability-related expense, the funds generally will be subject to income tax & an additional 10% federal tax penalty on the earnings portion of your withdrawal.
Before you invest in an ABLE account, you should read the plan’s offering circular to make sure that you understand & are comfortable with any plan limitations on withdrawals & are familiar with any account deposit “hold” rules which differ by state.
Some states may offer state income tax or other benefits for contributions to an ABLE account. However, these benefits may be limited to contributions to an ABLE account in the plan sponsored by the contributor’s home state. If you receive state income tax benefits for investing in an ABLE account, make sure you review your plan’s disclosure document before you complete a transaction.
Does having an ABLE account impact eligibility for other benefits?
Contributions from third parties to an ABLE account, qualified rollovers from other ABLE accounts, withdrawals for qualified disability-related expenses, & assets in an ABLE account are generally disregarded for the purposes of means-tested federal benefits. Additionally, for the purposes of determining eligibility for Supplemental Security Income (SSI), ABLE account balances up to $100,000 are excluded as resources of the individual. However, qualified distributions from ABLE accounts for housing expenses count towards the resource limit for federally funded means-testing benefits.
While some states note explicitly that ABLE account assets & income do not affect eligibility for state benefits, you should seek more information from the state on any potential impact. Upon the death of the beneficiary, outstanding qualified disability-related expenses, including funeral & burial expenses are paid from the ABLE account. After that, a state may make a claim against remaining funds in the account for Medicaid benefits received by the beneficiary that took place after the ABLE account was opened. Several states have enacted legislation that limit Medicaid payback for their state’s residents.
What questions should you ask?
Knowing the answers to these questions may help you decide which ABLE plan is best for you.
- What fees are charged by the plan? Under what circumstances does the plan waive or reduce certain fees?
- What is the minimum amount needed to open an account under the plan & what is the minimum for subsequent contributions?
- What is the aggregate limit on account value?
- Does the plan offer withdrawal methods such as checks, a debit card, or a recurring prescheduled withdrawal? What restrictions apply to withdrawals?
- What types of investment or savings options are offered by the plan? How long are contributions held before being invested or available for withdrawal?
- Does the plan offer special benefits for state residents? Would it be better for me to open an ABLE account in my state’s ABLE program or another state’s program? Does my state’s plan offer tax advantages or other benefits for investment in the plan it sponsors? If my state’s plan charges higher fees than another state’s plan, do the tax advantages or other benefits offered by my state outweigh the benefit of investing in another state’s less expensive plan?
- Who is the program manager? How have investment options under the plan performed in the past, knowing that historical results are not indicative of future performance?
Where can you find more information?
In 2015, the National Disability Institute created The ABLE National Resource Center to provide information on ABLE programs along with resources & best practices to help you select, open & manage an ABLE account. You can find out more about a particular ABLE program by reading its offering circular. Often called a disclosure statement, disclosure document, or program description, the offering circular will have detailed information about investment options, tax benefits & consequences, fees & expenses, limitations, risks, & other specific information relating to the ABLE plan. Most ABLE plans post their offering circulars on publicly available websites. The National Disability Institute created The Able National Resource Center, which provides links to most state programs.
Additional information about underlying mutual funds. You may want to find out more about a mutual fund included in an ABLE plan. Additional information about a mutual fund is available in its prospectus, statement of additional information, & semiannual & annual reports. Offering circulars for plans often indicate how you can obtain these documents from the plan manager for no charge.
Investment Adviser Public Disclosure website. Many ABLE plans’ program managers are registered investment advisers. You can find more about investment advisers through the Investment Adviser Public Disclosure website. On the website, you can search for the investment adviser & view its Form ADV. Form ADV contains information about an investment adviser & its business operations as well as disclosure about certain disciplinary events involving the adviser & its key personnel.
Electronic Municipal Market Access. You can search for ABLE plan disclosures on the Municipal Securities Rulemaking Board’s EMMA system.
IRS Guidance. You can learn more about the federal tax implications of ABLE accounts by reviewing the IRS guidance set forth in IRS Publication 907 – Tax Highlights for Persons With Disabilities.
Visit the SEC’s website for individual investors, Investor.gov.
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