Tax-advantaged savings approved for people with disabilities

Tax-advantaged savings approved for people with disabilities

In the final days of 2014, Congress approved a bill to create a new tax-advantaged savings vehicle for people with disabilities.

The Achieve a Better Life Experience (ABLE) Act amends the tax code beginning in 2015 and establishes tax-free savings accounts for people with disabilities. These accounts, which are similar to a 529 college plan, allow families of people with disabilities to save for the future with tax-free interest earnings to supplement benefits from private insurance, Social Security, or other programs. The accounts help families accrue private funds to be used for qualified expenses, such as transportation, education, and medical costs, that may not be covered under other programs.

The goal of the program is to encourage families to save to support individuals with disabilities “to maintain health, independence, and quality of life.”

Here are the bill highlights:

  • Accounts are available to people who were disabled prior to reaching age 26 (one account per person with disabilities)
  • Yearly contributions cannot exceed the annual gift tax exclusion (currently $14,000)
  • Contributions are made with after-tax dollars, growth and earnings within accounts are tax free, and withdrawals are tax-free if deemed “qualified”
  • Qualified disability expenses generally include medical, housing, transportation, employment, and education costs
  • Similar to 529 programs, non-qualified distributions are subject to taxation and a 10% penalty on earnings
  • Account balances are limited to $100,000 in total for those who are receiving Supplemental Social Security Income (SSI). People with disabilities currently receiving federal benefits are not negatively affected unless the account value exceeds the limit and SSI benefits would be suspended.

Accounts will operate similar to 529 savings programs as they will be sponsored and administered at the state level. It is likely states would offer similar investment options as seen in 529 programs currently.

The likely next step is for the Treasury Department to issue additional, detailed guidance including guidelines around determining disability status. Then, states will have to establish these programs before individuals can take advantage of them.

Introduced as a bill nearly a decade ago by Rep. Ander Crenshaw (FL), the proposal received Congressional approval as part of a larger collection of tax provisions in the final hours of the lame-duck session in December 2014.


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