A Brief Description of an ABLE Account

Yup, that is what I’m calling it – a brief description of an ABLE account. Brief because this is a broad overview of how an ABLE account works. A more detailed description is found in each state ABLE program’s “Plan Disclosure Document” (North Carolina’s), which usually can be found at the bottom of each state’s ABLE program website (North Carolina’s).

I like to simply explain the purpose of an ABLE account first so the need for an ABLE account can be understood first then if there is further interest a brief description of how to get started with an ABLE account can be discussed separately. This page is the latter.

Brief Description

1. Qualifying for an ABLE account

To be an eligible individual, he or she must:

• Be eligible for Supplemental Security Income (SSI) based on disability or blindness that began before age 26; or
• Be entitled to disability insurance benefits (DIB), childhood disability benefits (CDB), or disabled widow’s or widower’s benefits (DWB) based on disability or blindness that began before age 26; or
• Certify (or an agent under a power of attorney or, if none, a parent or guardian must certify) that the individual:
  • has a medically determinable impairment meeting statutorily specified criteria or is blind; and,
  • the disability or blindness occurred before age 26.

2. Choose a State Sponsored ABLE Program

Don’t get too concerned about which ABLE program to select. They are all very similar and only 10 unique ABLE programs to consider.

3. Designated Beneficiary

The eligible individual is the owner of the account and any money expensed from the account needs to be for the benefit of the eligible individual.

4. Person with Signature Authority

The account owner may have an authorized individual to act on the account on his/her behalf. That person may be a parent or legal guardian or a person granted a power of attorney or others as determined by the state-managed ABLE program.

5. Contributions to the ABLE Account

6. Tax-free Growth

Each ABLE program offers several different funds where money can be deposited. These funds usually include a cash-only account and investment options. The investment options range in risk from conservative to aggressive type investment funds.

The investment funds offered in each ABLE program are fully disclosed so they can be easily identified, researched, and reviewed. For example, North Carolina’s Aggressive Option Investment Fund includes the following underlying mutual funds:

There are additional costs when investing within ABLE programs, similar to costs that an individual might incur when investing funds in a 401k (because they are being managed by a 3rd party administrator) but all appreciated growth will be tax-free to the beneficiary, which can help offset some of these costs.

As an example of the associated costs of using the ABLE account, for the North Carolina program, two parts make up the costs. The asset-based fee for the Aggressive Option Investment Fund is 0.33% plus a flat quarterly fee of $14.50. If the entire ABLE account balance was $5,000 and was entirely invested in the Aggressive Option Investment Fund, the total cost for the year would be $16.50 ($5,000 * 0.33%) + $58.00 ($14.50 * 4 quarters) = $74.50. The quarterly fee becomes less significant with higher account balances but not so favorable with lower balances.

7. Debit Card Option

Most of the ABLE programs offer an option to use a debit card that will withdraw funds directly from the ABLE account. There may be additional fees to use the debit card.

Some of the ABLE programs require that some amount of money in the ABLE account be kept in the cash account portion of the ABLE account so that cash is available to be used on the debit card. Because of this restriction money that is sitting in cash cannot be available for investing which negates some of the reasons for having an ABLE account.

8. Distributions

A qualified withdrawal from an ABLE account is known as a qualified disability expense (commonly known as a QDE) for the benefit of the account owner (meaning the one receiving SSI) “for maintaining or improving health, independence, or quality of life” (IRS Publication 907).

When QDEs of ABLE accounts are discussed many try to put a qualified disability expense into a category like transportation, employment training, or a few other very specific categories that were first published when ABLE accounts were created. These kinds of discussions limit the scope of ABLE accounts and tend to discourage their use.

The latest guidelines from the IRS,(IRS Publication 907) explain that expenses need to be for the “maintenance or improvement of health, independence or quality of life” which would encompass any reasonable expense. The consensus is that non-reasonable, and thus nonqualified disability expenses, would be those for gambling, purchasing alcohol, or gifting.

9. Other Descriptions

State Tax Deduction/Credit

Your home state may offer a state tax deduction/credit when you contribute to an ABLE account. I live in Texas, which does not have a state tax, so it is not a major feature for me but you may want to consider it when you review various ABLE plans.

Program to Program Transfer

An individual who is receiving SSI can only have one ABLE account. If you choose to have your ABLE account managed by a different state-sponsored program, there can usually be only one rollover to another ABLE program per year.

Rollover from a 529 College Savings Plan

Contributions may be made by rollover from a 529 plan. The max annual contribution for any ABLE account within a year is $18,000 (in 2024), so any rollover from a 529 plan would be limited to $18,000 per year.

Medicaid Recapture

This is listed last since when some people describe ABLE accounts, Medicaid recapture or claw-back is mentioned as a major reason to not use an ABLE account when it has little to no comparison to the benefits of having an ABLE account.

When the ABLE account owner passes away most state Medicaid programs may claim payment from the account owner’s ABLE account in an amount equal to the total medical assistance paid for the account owner after the establishment of the account.

A few states have passed laws that do not seek Medicaid recapture or clawback (California, Colorado, Florida, Maryland, Pennsylvania, Oregon, Nebraska, and Virginia, among others). For these state programs (the account owner would need to be a resident of that state) the remaining balance of the ABLE account most likely passes onto the account owner’s beneficiaries or the owner’s estate.

Keep in mind that the passing of the account holder could be over 70 years from now, during which an ABLE account can generate a fair amount of tax-free growth, which could be used “for maintaining or improving health, independence, or quality of life” of the account owner for many, many years.