For those with disabilities, having an ABLE account can be a very important aspect of financial planning. In the wake of the Tax Cuts and Jobs Act of 2017, ABLE accounts reaped several benefits according to an article from Credit Karma, “ABLE Accounts: How Tax Reform Improved Accounts to Pay for Disability Expenses”.
ABLE (Achieving a Better Life Experience) accounts allow taxpayers with disabilities, who are eligible, to open and add to tax-advantaged savings without their access to benefits being affected. To be eligible, your disability needs to have arose before you were 26 years old. ABLE accounts work similarly to 529 education savings plans, and anyone can contribute to another’s account, but there is a cap on the total balance of the account and on how much you can personally contribute. The tax advantage of the account is that you don’t have to pay taxes on the money the account earns as long as your withdrawals do not exceed the expense of your disability.
Post tax reform, there were three main changes in ABLE accounts:
The first change is that account beneficiaries who are working can make additional contributions. If you qualify (you are working and your employer does not contribute to a workplace retirement plan for you), then you are allowed to contribute “the greater of your compensation or the federal poverty line amount for one-person households”. Thus, if you work and make less than up to $12,140, then all your wages can be placed in the ABLE account. The limits are higher for Alaska and Hawaii.
The second change is that the contribution that beneficiaries of ABLE accounts make now qualifies them for the Saver’s Credit (Retirement Savings Contribution). Up to $2,000 of your contributions may count toward the credit. This credit could be worth $1,000. If you are married and filing jointly, then you can contribute up to $4,000.
The third change is that you can now transfer funds from a 529 college savings plan to your ABLE account. This does not incur an ineligible withdrawal penalty! The amount transferred though, is considered as part of the annual contribution. In order to move these funds, the beneficiary of the ABLE account must be the beneficiary of the 529 as well, or be a sibling of the 529 beneficiary.
Understanding the ins and outs of an ABLE account is highly important for not only those with disabilities but for the loved ones of them as well. They are more complex than you realize, so make sure you seek a professional who can help you navigate contributions and other ways to make sure a disability is being properly funded.
For more information on ABLE accounts and the new tax changes, visit our website today and schedule your consultation!
Reference: Credit Karma, (August, 16, 2018) “ABLE Accounts: How Tax Reform Improved Accounts to Pay for Disability Expenses”