ABLE accounts were created with the passage of the Stephen Beck Jr. Achieving a Better Life Experience Act of 2014. An ABLE account is a tax-advantaged savings vehicle that can be established for a designated beneficiary who is disabled or blind. Only one account is allowed per beneficiary. ABLE accounts are programs established and maintained by a State. Virginia was one of the first state to establish ABLE accounts. The Tax Cuts and Jobs Act (TCJA) made three helpful changes in the rules affecting ABLE accounts. These changes will take effect in 2018.
Contributions to an ABLE account aren’t deductible, but amounts in the account grow on a tax-deferred basis. Distributions are tax-free up to the amount of the designated beneficiary’s qualified disability expenses, a term that is broadly defined to include basic living expenses, such as housing, transportation, and education, as well as medical necessities.
In addition to the tax advantages of an ABLE account, there’s a major non-tax advantage. The balance in an ABLE account and distributions used to pay qualified disability expenses are generally disregarded in determining eligibility for federal means-tested programs. This allows the beneficiary to save for the future without sacrificing current benefits.
Here are the three changes made by the TCJA:
- First, additional ABLE contributions are allowed. Contributions to an ABLE account can be made by the designated beneficiary or any other person. But until now, the total annual contributions by all persons couldn’t exceed the amount of the gift tax exclusion for that year. For 2018, that figure is $15,000.
TCJA allows the designated beneficiary (but no other person) to make additional contributions in excess of this limit. To be eligible to make these contributions, the designated beneficiary must be employed or self-employed and must not be covered by an employer’s retirement saving plan.
The additional contributions are limited to the lesser of (1) the previous year’s poverty line for a one-person household, currently $12,060 or (2) the designated beneficiary’s taxable compensation for the current year.
A designated beneficiary can contribute the full $12,060 for 2018 if the beneficiary’s 2018 taxable compensation is at least that much. When added to the original $15,000, that allows a total of $27,060 in contributions.
- Second, TCJA makes the designated beneficiary eligible for the saver’s credit for contributions to the ABLE account. An eligible lower-income taxpayer can claim a nonrefundable saver’s credit for a percentage of up to $2,000 of retirement savings contributions. The applicable percentage (50%, 20%, or 10%) depends on filing status and adjusted gross income. The maximum saver’s credit is $1,000 ($2,000 contribution × 50% credit percentage).
The saver’s credit is available for contributions to 401(k) plans, traditional or Roth IRAs, and certain other retirement plans. Until now, it wasn’t available for contributions to an ABLE account.
- Third, tax-free rollovers from 529 qualified tuition program (QTP) accounts to ABLE accounts. 529 qualified tuition program accounts have tax features similar to ABLE accounts, but are used to pay for the education expenses of a designated beneficiary, who needn’t be disabled.
It sometimes happens that the beneficiary of a 529 QTP account has finished with school but still has funds remaining in the account. If the beneficiary takes a distribution of the balance, there will be a tax bill to pay that includes a 10% penalty.
Until now, a distribution from a 529 QTP account couldn’t be rolled over to an ABLE account they could only be rolled to another 529 QTP. TCJA changes this rule, allowing a 60-day rollover from a designated beneficiary’s 529 QTP account to that same beneficiary’s ABLE account. But this would only work if the beneficiary is disabled or blind and has an ABLE account.
Alternatively, a 60-day rollover is possible from a 529 QTP account to the ABLE account of a member of the family of the 529 account’s beneficiary. A family member is defined broadly for this purpose. It includes the designated beneficiary’s spouse; child or descendant of a child; brother, sister, stepbrother, or stepsister; father, mother, or ancestor of either; stepfather or stepmother; niece or nephew; aunt or uncle; in-law; or the spouse of any of the above. It also includes a first cousin, but not a first cousin’s spouse.
There’s a dollar limit on the amount that can be rolled over in this way. The rollover amount, when added to other contributions to the ABLE account for the year, can’t exceed the gift tax exclusion amount for the year, which is $15,000 for 2018.
I hope this information gives you a basic understanding of these ABLE account changes. Please call me if you wish to discuss how they or any of the many other new tax rules in the TCJA might affect your particular situation, and the planning steps you might consider in response to them.
About the Author
James Snyder, CPA, CSPM is a principal at YHB in the Leesburg, VA office. He provides income and estate planning services, business consulting, and estate and trust administration services to successful individuals in many professions, especially engineering, law, technology and real estate. He also provides strategic guidance and planning for clients involved in stock option transactions and wealth transfer.