The Achieving a Better Life Experience (ABLE) Act allows individuals with disabilities and their families to save for disability-related expenses without jeopardizing their eligibility for means-tested federal benefits. But choosing the right ABLE savings account can be challenging, given the variety of options available.
Before diving into account options, here are the fundamentals of ABLE accounts:
- Individuals who developed their disability before the age of 26 can open an ABLE account.
- Earnings in ABLE accounts grow tax-free and withdrawals for qualified disability expenses are also tax-free.
- The annual contribution limit is $18,000 in 2024, but the total balance in the account may affect certain benefits if it exceeds $100,000.
Now that you have the basics, here are five key steps for picking the ABLE account that best fits your needs.
1. Become familiar with your state’s plan
Go directly to your state-sponsored ABLE plan’s website or search through the ABLE National Resource site at ablenrc.org. Skip to step 3 if you live in one of these four states that doesn’t have a plan: Idaho, North Dakota, South Dakota, and Wisconsin.
2. Quantify the potential tax benefits of using your state’s plan
The first type of benefit you receive with a plan sponsored by your residential state is a tax deduction or tax credit for part of your ABLE contribution on your next state tax return. For example, Virginia allows a state income deduction up to $2,000, which could save a taxpayer $115. Nebraska, on the other hand, allows a deduction of up to $10,000, which could reduce a person’s state tax bill by $246 to $664, depending on their marginal rate. While the state income tax savings should be considered, a second and much more significant tax break could come in the form of provisions in state law that make balances in ABLE accounts exempt, to some degree, from Medicaid payback (recovery of money) after the owner dies. The eight states that have the benefit of limited paybacks are: California, Colorado, Florida, Maryland, Nebraska, Oregon, Pennsylvania, and Virginia.
3. Consider another state’s plan
If the state income tax or payback limitations available through your own state’s plan don’t seem especially compelling, then consider shopping for an ABLE account from another state. This task is less intimidating than you might think.
Thirty-six states belong to one of three multi-state alliances whose plans are virtually identical, so the comparison-shopping process involves less than 10 distinct plans. If you live in one of the states that belongs to an alliance, you have already learned about one of those plans. Here’s how the alliances are currently configured:
- National ABLE Alliance: Alaska, Arkansas, Connecticut, Delaware, District of Columbia, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Mississippi, Montana, Nevada, New Hampshire, North Carolina, New Jersey, Pennsylvania, and Rhode Island.
- ABLE Collaboration: Alaska, Hawaii, Maryland, Oregon (ABLE for All).
- STABLE Partnership: Arizona, Georgia, Kentucky, Missouri, New Hampshire, New Mexico, Oklahoma, South Carolina, Utah, Vermont, West Virginia, Wyoming. None of these states accept non-residents into their plans. The lead state in this group, and the only one to accept non-residents, is Ohio.
- Finally, there are seven states with distinct ABLE plans: California, Colorado, Massachusetts, Nebraska, New York, Texas, and Virginia. All except Texas accept out of state participants.
To consider all your options, you should research seven to nine plans in total. The best way to do this is by using the comparison features at ablenrc.org. The site contains a variety of information about each plan, plus links to their websites where you can find more details on investment choices and past performance.
4. Compare plans using three additional factors
In addition to potential state income tax savings and limitations on Medicaid paybacks as mentioned above, there are three other important factors to consider when comparing plans:
- Hold times on cash contributions: one day or less with Massachusetts and Virginia vs. up to 20 business days for Ohio and Oregon.
- Fees for account setup, plan administration, mutual fund management and banking services vary widely among the plans.
- Customer service
5. Keep your options open
Whatever choice you make about opening an ABLE account, you can change your mind later and transfer the funds to another account, usually without penalty. For example, if the ABLE account is being opened for a young child with a goal of accumulating assets over a long period of time, the greatest weight in decision-making might be placed on identifying the strongest investment choices, while an account owner who is older and planning to fund the ABLE with annual contributions from a special needs trust might focus on the most convenient banking features and access to FDIC insurance.
Next steps
Choosing the right ABLE account requires careful consideration of several factors, including state programs, account features, and specific state benefits. By thoroughly researching and comparing your options, you can select an ABLE account that best meets your needs and helps you save for a brighter financial future.
Click here to download a form we have prepared to help you collect and compare the data on ABLE plans you are interested in learning about.
If you’re unsure about which ABLE account to choose, Mercer Advisors has wealth advisors who specialize in special needs planning. We can provide personalized guidance based on your specific situation and goals.
If you’re not already a Mercer Advisors client and want to know more about special needs planning, let’s talk.
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