Welcome to the first part in our five part series on ABLE accounts. In this part, we’ll discuss what an ABLE account is and what it offers. Throughout this series, we’ll discuss:
- Who may want to consider opening an ABLE account
- Why an ABLE Account may be a great opportunity for someone who is blind
- How to use an ABLE account to pay for blindness-related expenses
- Where to go to learn more and to open an ABLE account
What is an ABLE Account?
Before 2015, blind people who received Supplemental Security Income (SSI), Medicaid, or other government benefits, were only allowed to have up to about $2000 in savings to cover emergencies. This all changed with the passage of the Stephen J. Beck Jr. Achieving A Better Life Experience Act of 2014. The law allows states to establish tax-advantaged investment accounts that people with disabilities can use to save to pay for disability-related expenses including housing, transportation, medical expenses, education, and more. SSI and Medicaid recipients can save up to $100,000 in an ABLE account without impacting their benefits.
What is a tax-advantaged investment account?
What is an investment account?
An investment account is similar to a savings account. It allows you to earn compound interest on money you set aside to save for the future. A savings account, however, gives you only one way for your money to grow; the bank pays you a small amount of interest for keeping your money in their account.
An investment account offers you more choices. You can use the money you save to buy stocks, bonds, or mutual funds that often pay significantly higher interest rates than a typical savings account. These investments, however, come with more risk that your account will be worth less than you put into it at certain times. For someone who is able to gradually save a little money over a long period of time, though, the potential for risk may be low, and the potential for reward may be high. A financial advisor can help you protect your investments by helping you to decide how much risk you can tolerate based on your goals.
What are the tax advantages of an ABLE account?
Contributions to an ABLE account are made “after taxes”, meaning that there is no federal tax deduction for contributing money to an ABLE account. Some states do offer state income tax deductions, though, so it may be worth checking on the law in your state before opening an ABLE account.
The beneficiary of the account, the blind person, can withdraw money from the account to pay for qualified disability-related expenses without paying taxes on that money or impacting their government benefits. Money can be withdrawn little by little over a long period of time to cover regular expenses such as bus passes and paratransit tickets, or it can be saved for longer periods of time to cover larger expenses such as a new Braille display. You can even withdraw the money tax-free, as long as you spend it on qualified disability expenses, if you stop receiving benefits for some other reason, like finding a job.
What financial institutions offer ABLE accounts?
ABLE accounts are established by state governments, not by financial institutions. Some states, however, contract with other states or financial institutions to manage their ABLE programs. Massachusetts, for example, contracts with Fidelity. Other common ABLE account managers include The Nebraska State Treasurer, ascensus, and Intuition ABLE Solutions LLC. You can only have one ABLE account open at a time, but many states allow people from out of state to enroll in their programs, or to roll over money from one program to another. Most programs are similar, but there may be advantages to opening an ABLE account in the state you live in, I.e. a state income tax deduction.
What fees are charged to own an ABLE account?
Most states charge small fees to open and manage ABLE accounts. Typical fees include:
- $30 to $60 a year to keep the account open
- Around $2 for 50 checks if the ABLE program offers a checking account
- 3 to 0.9 percent a year for investment management fees
It’s also common for ABLE accounts to require that you contribute a minimum amount when you open the account, typically $25 to $50, and a minimum monthly contribution, also typically $25 to $50. These aren’t fees, though, these are contributions that you can withdraw for qualifying disability-related expenses. According to the ABLE National Resource Center, the Massachusetts ABLE program is unique because it doesn’t charge any monthly or yearly fees. Instead, it charges a slightly higher percentage of the assets in the account.
What investment options are available?
Most plans offer a high-yield savings account through Sally May, or Fifth Third Bank, and a selection of four to six mutual funds or exchange-traded funds. Funds are typically managed by well-known investment companies such as:
Some accounts also offer a checking account, typically through Fifth Third Bank, with a debit card that can be used to pay qualified disability-related expenses directly from the account. Some charge fees for using the debit card, though, or for buying checks. The IRS can also charge you a tax penalty for using your ABLE account for non-qualified expenses, so this may not be a good substitute for a checking account from your favorite bank. Qualifying expenses are interpreted very broadly by the Internal Revenue Service (IRS), though, so people with lower incomes may find that an ABLE account can be used as their only account.
What are qualified disability-related expenses?
The Internal Revenue Service (IRS) defines guidelines for using an ABLE account. More specifically, they define the types of expenses you can pay for using money from an ABLE account. These include:
- Employment training and support
- Assistive technology and personal support services
- Health, prevention, and wellness
- Financial management and administrative services
- Legal fees
- Expenses for oversight and monitoring
- Funeral and burial expenses
- Other expenses defined by the secretary of the treasury under regulations which are consistent with the law
The treasury department has since proposed that any expenses qualify if they’re related to improving the beneficiary’s “health, independence, or quality of life”. This means that the expense doesn’t need to be medically necessary, and doesn’t need to be an expense unique to a person’s disability. In other words, a mortgage or rent payment is a qualifying expense, even though most of us have a similar expense whether we’re blind or not. Other examples of qualifying expenses include smartphones, if they’re used as a navigational aid, bus passes, Uber or Lyft rides, travel canes or other mobility aids, guide dog expenses, and even fees for cleaning or home maintenance, whether or not your blindness limits your ability to do those things yourself.
The ABLE National Resource Center encourages ABLE account owners to keep detailed records of the things they pay for with their ABLE account incase the IRS were to ever question those expenses. This is a good idea for anybody whether or not they have a disability.
What do I need to do to open an ABLE account?
The ABLE National Resource Center provides links to each active state program. At the time this was written, each program allows you to open an account online. The online application process may request that you provide documentation of your blindness or disability. If you’re a parent or relative of someone who is blind or disabled, you can open an account for them, but only the beneficiary, the person who is blind or disabled, is considered to be the owner of the account.