On December 19, 2014, the President signed into law the Tax Increase Prevention Act of 2014. This legislation included the Achieving a Better Life Experience Act of 2014 (ABLE Act), which provides for a new type of tax-advantaged account for disabled persons called ABLE accounts.
New Type of 529 Plan
The tax laws have long encouraged Americans to save for college for their children and to save for their retirement. But for families of those with disabilities, there was no tax-advantaged way to save for those individuals. The Tax Increase Prevention Act contains an important new provision that changes that.
The new law, which applies for tax years beginning after December 31, 2014, allows states to create ABLE accounts, which are tax-free accounts that can be used to save for disability-related expenses under Section 529 of the Internal Revenue Code.
Top 10 List
Here are the 10 key features that you should know about ABLE accounts:
ABLE accounts can be created by individuals to support themselves or by families to support their dependents.
There’s no federal taxation on funds held in an ABLE account. Assets can be accumulated, invested, grown and distributed free from federal taxes. Contributions to the accounts are made on an after-tax basis. (In other words, no federal tax benefits are provided for those who contribute to an ABLE account.) But assets in the account grow tax-free and are protected from tax as long as they’re used to pay qualified expenses.
Money in an ABLE account can be withdrawn tax-free if the money is used for disability-related expenses. Expenses qualify as disability related if they are for the benefit of an individual with a disability and are related to the disability. They include costs related to such items as:
- Employment support,
- Health, prevention and wellness costs, and
- Assistive technology and personal support services.
Distributions used for non-qualified expenses are subject to income tax on the portion of such distributions attributable to earnings from the account, plus a 10 percent penalty on that portion.
Each disabled person is limited to one ABLE account, and total annual contributions by all individuals to any one ABLE account can be made up to the gift tax exclusion amount ($14,000 in 2015, adjusted annually for inflation). Aggregate contributions are subject to the state limit for education-related Section 529 accounts.
ABLE accounts can generally be rolled over only into another ABLE account for the same individual or into an ABLE account for a sibling who is also an eligible individual.
Eligible individuals must be blind or severely disabled and must have become so before turning 26, based on marked and severe functional limitation or receipt of benefits under the Supplemental Security Income (SSI) or Social Security Disability Insurance (DI) programs. An individual doesn’t need to receive SSI or DI to open or maintain an ABLE account, nor does the ownership of an account confer eligibility for those programs.
ABLE accounts have no impact on Medicaid, but, in certain cases, SSI payments are suspended while a beneficiary maintains excess resources in an ABLE account. More specifically, the first $100,000 in ABLE account balances is exempted from being counted toward the SSI program’s $2,000 individual resource limit. However, account distributions for housing expenses are counted as income for SSI purposes. Assuming the individual has no other assets, if the balance of an individual’s ABLE account exceeds $102,000, the individual is suspended, but not terminated, from eligibility for SSI benefits, but remains eligible for Medicaid.
Upon the death of an eligible individual, any amounts remaining in the account (after any reimbursements to Medicaid) will go to the deceased’s estate or to a designated beneficiary and will be subject to income tax on investment earnings, but not to a penalty.
Contributions to an ABLE account by a parent or grandparent of a designated beneficiary are protected in bankruptcy. In order to be protected, ABLE account contributions must be made more than 365 days prior to the bankruptcy filing.
More Details in the Works
The U.S. Treasury Department plans to publish implementation guidance on ABLE accounts no later than June 19, 2015. For more details on how to set up an ABLE account, eligibility requirements or any other aspect of the new law, contact your legal and financial advisers.
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