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ABLE Account | Definition & How It Works

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Living with a disability is tough enough, but many people with disabilities also find themselves in tough financial situations. Obtaining disability benefits from certain government programs like Supplemental Security Income (SSI) requires meeting a means test. In essence, if you have more than a couple thousand dollars saved up, then you will not meet the eligibility requirements for the program. However, most of these people do not have the financial means to live on their own without some assistance. So, what are they to do? This is where the ABLE program comes into play. Keep reading as we explain exactly what an ABLE account is, how these accounts work, and who can qualify for one.


What Is An ABLE Account?

An ABLE account is a special type of tax-free savings account that allows some special advantages for disabled people and their families. ABLE comes from the name of the law allowing for these accounts – the Achieving a Better Life Experience Act. You might also hear these called 529A accounts. These accounts are allowed to grow tax-free, and the beneficiary and owner of the account is the disabled person. One of the biggest advantages of these accounts is that the assets in the account are not counted toward that person’s resources when determining eligibility for government benefits like SSI, Medicaid, and other programs that require low income.

Anyone may contribute to an ABLE account. This includes the account owner themselves, friends, family, a Special Needs Trust, and other sources. While the money in the account can grow tax-free for the beneficiary, the contributions are not generally tax deductible. Some states may allow tax deductions, but the IRS does not provide deductions for ABLE contributions. The funds in these accounts may be used by the owner / beneficiary for many different things. Eligible expenses will be discussed more later in this article, but generally they can be used for accessible housing, assistive technology, medical expenses not paid by Medicare or Medicaid, and many other disability-related expenses. These accounts help eligible individuals maintain a higher quality of life, and they do not count against them when determining eligibility for needs-based assistance programs.


ABLE Account Eligibility & Tax Treatment

So, who can open an ABLE account and do they receive any special tax treatment? There are a few rules that must be met to qualify for an account of this type. First, the individual must have a disability that began before age 26. If the person is already receiving SSI benefits or Social Security Disability Insurance (SSDI) benefits, then they can automatically qualify for an ABLE account. If they are not receiving disability benefits from the Social Security Administration, they can still qualify for an ABLE savings account with some additional documentation. This includes a letter of disability certification from a licensed physician, and the disability must meet the Social Security disability rules.

When it comes to taxes, an ABLE account is allowed to grow tax-free for the beneficiary. Unlike a simple savings account, there are many investment options for an ABLE account. The option you choose likely will depend on your risk tolerance and estimated future financial needs. If you contribute to an ABLE account, do not count on any tax deductions though. The tax benefits for contributors are very limited. There is no Federal deduction for contributions, but some states do allow small deductions for these contributions on your state income taxes. Contributions must be made with after-tax dollars, and there is no income tax assessed on the withdrawals when they are made.


Contribution Limits For ABLE Accounts

You might be wondering how much money can be placed into an ABLE account. The law does have some limits on contributions, so here is what you need to know. The first thing you need to know is that the annual contribution limit to a single ABLE account is capped at $15,000. This includes contributions from all sources. So, for instance, if your parents contribute $10,000 to your account and your grandparents contribute $5,000 in a year, then no further contributions can be made to your account because the limit has been reached. Note that this limit aligns with the IRS rule regarding the gift tax exclusion.

You should also be aware that many states set limits on the total amount that may be placed into an ABLE account. This amount varies by state, and it generally aligns with the state rules on 529 education savings plans. In 2021, these limits range anywhere from $230,000 to $550,000. This should be kept in mind if you open an ABLE plan somewhere other than your home state as well.

If your account balance approaches these limits, then you should also be aware of an additional fact. If your account reaches more than a $100,000 balance, then your SSI benefits will be affected. The first $100,000 in your account is basically exempt from the means-test for SSI eligibility if you have no other resources, but when the ABLE account and your other resources subject to the test reach $100,000 then your SSI benefits will be temporarily stopped. As soon as the amount falls below $100,000, then your benefits can be resumed again. There is no time limit to how long the benefits can be paused.


ABLE Qualified Expenses

So, what exactly can this money be used for? In general, the money must be used for disability-related expenses. Many of these qualified disability expenses deal with accessibility. They could be for accessible housing, accessible transportation, or assistive technology. The funds can also be used for health care expenses, including wellness and preventive care, as well as financial management and administrative services.

Some people with ABLE accounts may wish to attempt to return to work. In that case, the money in the account can be used for education or employment training and support. Distributions can also be used to pay for legal fees, funeral and burial expenses, and even basic living expenses. As long as the money is used for the designated beneficiary, then the ABLE Act provides for a wide range of items that it can be used on. It covers everything from obtaining a power of attorney to paying for accessible housing and many things in between. There is also an organization available called the ABLE National Resource Center that is available to help answer questions and guide you on the establishment and usage of ABLE accounts.


ABLE Account VS Special Needs Trust

You might be wondering why you would want to establish an ABLE account instead of a special needs trust. This type of trust is often used to put money aside for a child or family member with special needs or a disability. There are a few differences, however.

First, the ABLE account affords the beneficiary much greater flexibility in how the funds in the account are used. It is generally easier to access the funds, and the investment strategies used in the account can be easily changed if the need arises in the future. The type of account that you ultimately use will depend on your specific personal situation. However, there is nothing that prevents you from having both types of accounts. In fact, many people find that a combination of an ABLE account and special needs trust ultimately accomplish the goal that they wish to achieve when it comes to financial planning.


The Bottom Line

ABLE accounts are great tools that allow for people with disabilities to have financial security while still being able to take advantage of government benefits to which they should be entitled. These accounts provide some great tax advantages for the beneficiary, and anyone can contribute to the account including friends, family, and even trusts. If you already receive SSI or SSDI benefits, then you should consider opening an ABLE savings account today.


Frequently Asked Questions


Who qualifies for ABLE accounts?

A person who is already receiving SSI or SSDI benefits will automatically qualify for an ABLE account. If you do not receive these benefits but you are disabled, you can still qualify. You will simply need to have a disability onset date before your 26th birthday, and you will need a disability determination letter from a licensed physician.


Who controls an ABLE account?

The account owner or beneficiary controls the account, and this is the disabled person. In the event that the disabled person is a minor, then a parent or guardian can control the account until the child reaches the age of majority. In the event that a disabled adult is unable to open the account on their own, then they must have an authorized legal representative open and control the account for them.


What is the maximum income for an ABLE account?

There are no income limits for establishing an ABLE account. However, your income might affect your ability to receive government benefits like SSI or Medicaid. To qualify for these programs, you generally must have very little to no income or resources outside of your ABLE account.


​Do banks offer ABLE accounts?

Yes, many banks offer these types of accounts. The rules managing the accounts vary slightly from state to state. In addition, you can choose to establish an account outside of your state of residence if the rules in that state meet your needs better than your own state rules. However, an individual with a disability can only have one ABLE account regardless of where it is opened.