Remember the Achieving a Better Life Experience (ABLE) Act, which was passed in 2014 and authorized tax-favored savings accounts for people with disabilities? Proposed regulations issued in 2015 provided a blueprint for creating these ABLE accounts and authorized the IRS to develop forms needed for reporting purposes. Another law passed in December 2015 eliminated certain restrictions on the accounts. Now individual states are gearing up for action. So far, 40 states and the District of Columbia have approved legislation for ABLE accounts, including a consortium of nine states that are working together. If your state does not yet offer ABLE accounts (Indiana adopted ABLE accounts on March 21, 2016), you can open one in a state that does.
How the accounts work. An ABLE account resembles a Section 529 college savings plan, but is designed to benefit people with disabilities. The account offers a way to accumulate savings without losing other benefits. In brief, you establish an account for an eligible individual, make a contribution, and choose an investment option. The funds in the account grow on a tax-deferred basis. For 2016, the maximum contribution is $14,000, which may be sheltered from gift tax by the annual gift tax exclusion.
Account distributions for qualified expenses are tax-free. Qualified expenses include payments for education, housing, transportation, employment training and support, assistive technology, personal support services, health care expenses, and financial management and administrative services.
ABLE accounts are restricted to individuals who experienced the onset of a significant disability before age 26. A family member who meets this requirement and who is already receiving Supplemental Security Income and/or Medicaid is eligible to participate, typically with no impact to those benefits. However, when total assets in the account exceed $100,000, the Supplemental Security Income will be suspended until the balance drops below this threshold.
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