Tax-Free Savings Accounts for Disabled Are On the Horizon for 2016
When it comes to how much the disabled can have in a savings account without being disqualified for government benefits, things are about to change – big time. Currently, those people with disabilities eligible for Medicaid or federal Supplemental Security Income are limited to a maximum of $2,000 in savings bank accounts or other assets. Under the Achieving a Better Life Experience (ABLE) passed in 2014, the maximum amount allowed before jeopardizing federal benefits is getting a hike to $100,000.
It's taken time for various state programs to initiate the account's availability, but Virginia is poised for the first quarter of 2016, and Florida will offer it by July 1, 2016. The dates vary, as each state must approve its own legislation to set up the plan. To date, there are 10 states that have taken no action on this issue. The rest of the states either have current legislation or bills pending.
Able accounts, sometimes referred to as 529A accounts, are modeled on the popular 529 college savings accounts. The disabled person, friends and family can contribute to the accounts. There is no federal tax deduction for contributions but the earnings accumulate tax-free as long as they withdrawn to pay for eligible expenses. Advocates from special interest groups like the National Down Syndrome Society and the disabled population are excited about the increase with the Able account. Many groups receive daily emails from disabled people and their families inquiring how to go about opening an Able account.
The Able account is intended to encourage the disabled population to work and to help families with disabled children plan for their long-term needs. Generally, families set up special-needs trusts for their children's long-term needs. But, special needs trusts incur costly legal fees to set up and require annual tax filings. At the same time, it won't eliminate the need for special-needs trusts. Most likely, families will be using a combination of an Able account and special-needs trusts.
A Peek at the Provisions of the Able Account
The Able account isn't without its limitations. Here's a peek at them:
- To quality, a person must have disabled before 26 years of age
- Annual gift tax exclusion is $14,000
- Funds can be used for health care, education, legal, housing and transportation expenses
- Only one 529A account can be opened, and it must be established in the state lived in
- After the beneficiary of the 529A dies, remaining funds are required for Medicaid repayment
While the Able account is a win for the disabled population, there are some critics. With the $14,000 a year contribution limit from any source, it will take a number of years before significant tax savings. A special-needs trust will still be needed for any disabled person who receives over $14,000 a year or $100,000 overall. And while the qualified expenses are broad, it doesn't include food, entertainment or vacations. Lastly, remaining funds cannot be left to siblings or others when the beneficiary passes.