New ABLE Accounts Could Be the Next Best Thing to “Sliced Bread”, or at Least IRAs

New ABLE Accounts Could Be the Next Best Thing to “Sliced Bread”, or at Least IRAs

Everyone loves to tout their new strategy as the next best thing to ‘sliced bread’, but in the case of disabled individuals trying to build a little savings and not relying wholly on government subsidies, this certainly may be the case.

On Dec. 19, 2014, President Obama signed into law the “Tax Increase Prevention Act of 2014” (TIPA), which provides for a new type of tax-advantaged savings program to help in meeting the financial needs of disabled individuals and of families raising children with disabilities.

This new program allows states to establish tax-exempt “Achieving a Better Life Experience” (ABLE) accounts, which are tax-free accounts that can be used to save for disability-related expenses. For those with children or extended families members that are under the age of 26 and disabled, these can be amazing accounts created and designated to help those who are disabled.

Assets can be accumulated, invested, grown and distributed free from federal taxes. Contributions to the accounts are made on an after-tax basis (i.e., contributions aren’t deductible), but assets in the account grow tax free and are protected from tax as long as they are used to pay qualified expenses.

ABLE accounts can be created by anyone to support themselves, their dependents to support their dependents with disabilities.  Thus, contributions can come from anyone and would be considered a ‘gift’ to that individual.  However, unlike an IRA, each disabled person is limited to only (1) one ABLE account. Moreover, they can only be established for individuals determined to be disabled before age 26.

But of course, the beauty is that the growth of the funds and withdrawals are tax-free if the money is used for disability-related expenses including: education; housing; transportation; employment support; health, prevention, and wellness costs; assistive technology and personal support services. Yet, just like a Health Savings Account (HSA), a non-qualified distribution (for something other than a disability-related expense) is subject to income tax and a 10% penalty on the part of the distribution attributable to earnings.

For 2015, the total annual contributions by all individuals to any one ABLE account can be made up to the inflation-adjusted gift tax exclusion amount of $14,000.  (It’s expected that the contribution amount will increase at the same pace and rate under inflation guidelines for the Gift Tax Exclusion (also $14,000 for 2015).

Can the ABLE account be Self-Directed-  Of course, many of my more advanced investors will immediately ask the question “Can these ABLE accounts be ‘self-directed’ in a similar fashion to that of an IRA or 401k?”.  The answer at this time, is that we simply don’t know. There are other subtle, but potentially important differences between ABLE accounts and 529 accounts or IRAs. The language authorizing act is actually housed in the same part of the tax code that governs college savings plans (Section 529).  529 plans are managed by designated state agencies and don’t allow for “self-direction” and alternative investments.

Planning Strategy- First and foremost, it is clear that these are plans were meant to be set up for younger individuals (under age 26) that are already facing terrible odds with a major disability.  Many are hesitant to save money or create trust accounts for these individuals because SSI benefits have resource and income limits, thus imposing harsh penalties for striving to create a nest egg to help the disabled.  However, amounts in an individual’s qualified ABLE account (including earnings), contributions to the individual’s account, and distributions to pay qualified disability expenses are disregarded for purposes of determining an individual’s eligibility for, or the amount of, any assistance or benefit authorized by any federal means-tested program. This rule overrides any other federal law that requires those amounts to be taken into account.

In sum, Congress gave the U.S. Treasury Department until July of 2015 to come up with rules and guidance for the new program, so stay tuned for more info. It might be months before the program is available in your area.  As we learn the details of how the plans operate, you will immediately get the 411.

Mark J. Kohler is a CPA, Attorney, Radio Show host and author of the book “Lawyers are Liars- The Truth About Protecting Our Assets”,  and “What Your CPA Isn’t Telling You- Life Changing Tax Strategies”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP.  For more information visit him at www.markjkohler.com.

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