FINANCIAL PLANNING
HOW TO SAVE MONEY without LOSING FINANCIAL ASSISTANCE
BY MEGAN PRESTON
People everywhere struggle with personal finance and people with disabilities are no exception. Creating a plan for yourself is a complicated process made even more complex when you factor in the unique expenses and assistance programs for individuals with disabilities. Families want to provide the best care for their loved ones, but they do not want to pay more than necessary for that care. Finding a balance between various disability assistance and benefit programs and your own personal finances can be a real challenge.
Individuals with disabilities can only own a limited amount of assets without risking losing their eligibility for "means tested" benefit programs. This limit greatly impacts an individual's ability to pay all their expenses and improve their standard of living. Paying for anything outside the usual expenses can be stressful and overwhelming if not impossible. It goes without mentioning that living with a disability can result in extraordinary costs that can stretch your resources, but when you are limited on how much you can have saved to cover these costs, you can feel like you're out of options. One option to be able to save more for these extra needs is an ABLE account.
ABLE accounts came about as a result of The Stephen Beck Jr. "Achieving a Better Life Experience" (ABLE) Act that became law on December 19th, 2014. They allow states to sponsor programs that offer the opportunity to invest and save on a tax-favored basis without jeopardizing their eligibility for government disability-related benefits. An attorney specializing in special needs would be able to best advise on how an ABLE account would affect these benefits. An individual with a disability is the account owner and beneficiary of the account. Any of the following references to the account owner or the beneficiary should be considered the same person.
ABLE accounts are opened under a state-specific 529A ABLE program. It is not necessary to use the program set up by the state you live in. You can use a different state's plan as long as the other state's plan accepts out-of-state residents. A state can choose to use its own investment program, another state's program, or an entity such as a financial company. There should be various investment strategies to choose from within each program, and each strategy should be carefully considered. The maximum number of times you can change the investments in an ABLE account is twice per year. Performance and fees are two important things to consider as they directly affect the account balance. You should also consider what investments and investment allocations would help to meet the beneficiary's needs and risk tolerance. The programs differ from state to state, so doing research ahead of time is very important. An ABLE account is an investment account that is tax-deferred, meaning the investments aren't taxed while they are in the ABLE account, similar to an IRA. This greatly helps the account grow over time as interest and dividends are not taxed and can be reinvested. While the contributions to an ABLE account are not tax deductible, any withdrawals taken from the account are tax-free as long as they are used to pay for the beneficiary's qualified disability related expenses. These expenses are broadly defined in Internal Revenue Code Section 529A(e)(5) as:
"Any expenses relating to the eligible individual's blindness or disability… including the following expenses: education, housing, transportation, 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, and other expenses, which are approved by the Secretary under regulations and consistent with the purposes of this section."
Any distributions of investment earnings that are not used for the beneficiary's qualified disability related expenses are subject to income tax and a 10% penalty tax. The ability to take tax-free distributions for the beneficiary's qualified disability expenses is one advantage of ABLE accounts.
Another advantage of ABLE accounts is that they are generally disregarded in the calculation for determining eligibility for Federal "means tested" programs such as Supplemental Security Income (SSI), Medicaid, or public supports such as Supplemental Nutrition Assistance Program (SNAP) and Temporary Assistance for Needy Families (TANF). One important exception to this is that distributions from the ABLE account that are used to pay for the beneficiary's housing expenses will be counted as income when applying for SSI. Another is that if the account has at least $100,000 or more, the beneficiary's SSI benefits would be suspended, but the beneficiary would not be considered to be disqualified from receiving SSI. This is important for those who are eligible for Medicaid because they also qualify for SSI since, even though the SSI benefits would be suspended, Medicaid benefits could continue.
GETTING THE JOB DONE: ABLE accounts are a unique tool only available to some. It gives the opportunity to save and invest money in a tax-deferred account that offers tax-free withdrawals for qualified disability-related expenses, and it generally is disregarded when it comes to many "means tested" programs that some individuals with disabilities rely on.
RESTRICTIONS
As this type of account has several advantages designed to benefit those with disabilities, it has restrictions on who can qualify to use such an account. First, the beneficiary must be blind or meet the Social Security Administration's definition of being fully disabled. This means the individual must suffer from a mental or physical impairment that prevents him or her from engaging in any substantial gainful employment and the impairment must have lasted for at least five months and is expected to last for at least 12 months, or result in death.
Second, while the beneficiary can be any age when the account is created, he or she must have been blind or disabled before age 26. Once the account is created, it can remain open for the life of that individual, even if he or she ceases to be disabled. In the case that the beneficiary is no longer disabled, the distributions from the account would be used for things other than qualified expenses and thus may be taxable and subject to a penalty. Alternatively, the ABLE account could be moved to a sibling or step-sibling of the original beneficiary, as long as the new beneficiary also meets the qualifications to be an ABLE account owner.
While the individual who has a disability would be the account owner as well as the beneficiary, a family member or other third party can help manage the account, if necessary, since many individuals with disabilities are capable of making their own financial decisions. Anyone – parents, grandparents, siblings, friends and even the beneficiary – can contribute to ABLE accounts, although there is a limit of one ABLE account per eligible person. This can be a benefit for those who prefer to keep track of fewer accounts. The total that can be contributed to an individual's ABLE account from all donors is equal to the annual exclusion in that year, e.g., $15,000 in 2020, or the sponsoring state's 529 plan limit if it is less. This limit does not apply to ABLE account rollovers that go from one sibling to another, as mentioned before. The contributions made to an ABLE account are not tax deductible and so they are treated as gifts to the beneficiary, and the donor's annual exclusion amount (also $15,000 per donor/done in 2020) can be used to offset gift tax consequences. Please consult your tax advisor or tax specialist to discuss the tax implications of utilizing ABLE accounts. Each state also has a limit on how much money can be saved in an ABLE account however and that limit ranges from $235,000 to $529,000. You should always check on the applicable limits when researching ABLE programs that are available to you.
ABLE accounts are a unique tool only available to some. It gives the opportunity to save and invest money in a tax-deferred account that offers tax-free withdrawals for qualified disability-related expenses, and it generally is disregarded when it comes to many "means tested" programs that some individuals with disabilities rely on.
While ABLE accounts do not solve every issue when it comes to the personal finances of individuals with disabilities, they are a tool for planning for the future and helping beneficiaries improve their lives. For those who would like to learn more about ABLE accounts please visit the ABLE National Resource Center at ablenrc.org •
ABOUT THE AUTHOR:
Megan Preston is a Financial Advisor at Robert W. Baird & Co. in La Crosse, Wisconsin. She helps clients develop customized strategies to meet their personal and familial goals. Baird does not offer tax or legal advice. Megan lives in La Crosse, Wisconsin. She can be reached at MPreston@rwbaird.com.