Tax-Advantaged Savings for the Special Needs

If you have a child or relative with special needs or a disability, one of the biggest fears is providing for them ​​financially. You want to make sure that person has a sustainable income when you die. 

The ABLE Act helps individuals with a disability save extra money. In the past, individuals who relied on government assistance programs like Social Security Income and Medicaid could not save more than $2,000 annually. Otherwise, they could lose their benefits. 

The ABLE Act allows families to offer an additional savings strategy for individuals with a disability. Anyone can contribute to an ABLE account, but the account must be used for a person with a disability. 

What Are ABLE Accounts?

ABLE accounts are tax-advantaged savings accounts for individuals with disabilities and their family members. The ABLE account was created in 2014 when legislators passed the Stephen Beck Jr. Achieving a Better Life Experience of 2014. It is better known as the ABLE Act, and these accounts are Section 529A savings accounts. 

Under this law, individuals with disabilities can hold as much as $100,000 in an ABLE account and still receive government benefits such as Medicaid and Supplemental Security Income.

In 2017, the Tax Cuts and Jobs Act made significant changes to ABLE accounts, allowing individuals who are working to put in more money and even roll money from their qualified tuition programs, such as a 529 college savings plan, into ABLE accounts.

Although ABLE accounts are administered by states, most states don’t have a residency requirement, so you may be eligible to invest in an ABLE account from another state.

The contributions aren’t tax-deductible, but earnings in an ABLE account aren’t taxed. Rules governing ABLE accounts change annually based on IRS guidance, similar to a 401(k) plan or IRA. There are guidelines and caveats for withdrawals from these accounts. 

ABLE Account Eligibility Requirements

Anyone can sign up for an ABLE account, but the beneficiary needs to be someone diagnosed with a disability before age 26. If you are receiving Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI), you’re automatically eligible for an ABLE account. 

SSI is a federal program designed to assist blind and disabled people with little or no income. Social Security Disability Insurance pays benefits if you’ve worked and paid Social Security taxes. 

The National Disability Institute estimates that more than eight million Americans with disabilities are eligible to open an ABLE account. There are likely more than 100,000 ABLE accounts with a combined value of more than $1 billion. 

If you’re 26 or older, you can sign up for an ABLE account if you aren’t receiving benefits as long as the disability began before age 26. In this case, you need a disability certification signed by a licensed physician confirming that the individual meets Social Security’s definition and medical criteria regarding limitations. Disabilities that may be eligible for ABLE accounts include:

  • Blindness
  • Certain cognitive disabilities 
  • Certain mental health issues, such as schizophrenia or bipolar disorder

ABLE Account Contribution Limits

The contribution limits vary based on the IRS rules. In 2022, you can contribute $16,000 annually to an ABLE account. 

But you can save even more if you’re working. Under a Tax Cuts and Jobs Act provision called ABLE TO WORK, you can earn income and contribute your earnings on top of the $16,000 annual limit. 

If you live in the continental United States, that additional contribution works out to the lesser of your gross income for the current tax year or $12,880. If you live in Hawaii or Alaska, you can contribute $14,820 or $16,090 extra, respectively.

You can’t contribute to an ABLE account if you also contribute to another retirement plan, such as a 401(k) plan or 403(b) plan. Some other caveats apply. 

You can accumulate up to $100,000 in your ABLE account without risking SSI eligibility. Once made, your contributions grow tax-free. 

Qualified Disability Expenses (QDEs)

Funds in an ABLE account must be used for qualified disability expenses. These expenses help a person maintain a solid quality of health and independence. 

Qualified disability expenses may include:

  • Education
  • Housing
  • Transportation
  • Eligible healthcare expenses
  • Food
  • Financial management expenses, such as investment advisory fees
  • Administrative and legal fees

But several expenses could be considered inappropriate or misuse of the funds in the ABLE account especially if the expense is not used for the person with a disability. For instance, one expense that would be murky is using ABLE money to go on vacation, according to the ABLE National Resource Center. The IRS audits ABLE accounts to ensure compliance. 

If there has been mismanagement of the funds, you could be penalized and the funds could be hit with a 10% penalty and taxes. Plus, your eligibility for benefits could be in jeopardy. Keep receipts for all purchases from an ABLE account. 

How an ABLE Account Affects Public Benefits

In most cases, you can have an ABLE account without it impacting public benefits such as Social Security Income (SSI) and Medicaid. But you must keep track of your contributions annually to make sure your account doesn’t go above $100,000. 

Supplemental Security Income (SSI)

The rule for Supplemental Security Income is if you have more than $2,000 in assets, it could hurt your benefits. However, the ABLE account is the exception. The first $100,000 in an ABLE account doesn’t harm your eligibility for SSI. 

If you have more than $100,000 in your account, your SSI payment could be temporarily suspended until the value is $100,000 or below. 


You can contribute to an ABLE account and still receive your Medicaid benefits. While it’s not advised to hold more than $100,000 in the ABLE account because it will harm your SSI payments, it won’t impact your Medicaid status if you have more than $100,000 in your ABLE account. 

However, if your non-ABLE resources — such as certain other bank or investment accounts — are more than $100,000, then Medicaid could be suspended. 

ABLE Account FAQs

ABLE accounts are an extraordinary benefit for individuals with disabilities and their families, but you must be sure you understand all of the nuances of these accounts. If you don’t, you could get hit with penalties and taxes. 

Who Can Contribute to an ABLE Account?

Anyone can contribute to an ABLE account. But the designated beneficiary of the ABLE account must be someone who meets the criteria outlined by the Social Security Administration. An eligible individual can only have one ABLE account. 

What’s the Difference Between an ABLE Account vs. Special Needs Trust?

ABLE accounts and special needs trusts benefit people with disabilities but have different rules and guidelines. While the money you earn in an ABLE account is tax-free, the money in a special needs trust is taxable each year. 

ABLE accounts are easier to set up. Trusts often need to be created with the help of a lawyer. But unlike ABLE accounts, special needs trusts don’t have contribution limits. However, they do need designated trustees to manage their investments and tax liabilities.

Can You Have More Than One ABLE Account?

Yes, you can have an ABLE account for yourself and also open and manage ABLE accounts for others. 

Let’s say you have a cousin with a disability and know someone else with a disability. You can open accounts for both people, who are known as beneficiaries. However, each beneficiary can only have one account. 

Is an ABLE Account Transferable?

You can only have one ABLE account at a time and cannot transfer from one ABLE account to another. However, if you want to close one ABLE account and open another, you can do so. 

If you want to change the account’s beneficiary, you are allowed in certain circumstances, but red tape is involved. For example, the IRS allows a transfer to an account owner’s ABLE-eligible sibling who is a family member.

What Are the Tax Benefits of an ABLE Account?

Contributions to an ABLE account are not deductible. But the distributions, including earnings on investments held in the account, are tax-free to the beneficiary as long as they’re used to pay for qualified disability expenses.

Do You Have to Open an ABLE Account in the Eligible Individual’s State?

The original law had stated that an individual had to open an account in their state of residency, but lawmakers eliminated that provision in 2015. You can open an account for someone in another state regardless of where you reside — as long as that state accepts out-of-state residents. Use the ABLE Resource Center’s state comparison tool to review each state’s program and each state and decide which one works best for you.

Final Word

An ABLE account is an extraordinary tool for someone with a disability to provide additional financial assistance. Like a retirement account, you can set up automatic withdrawals from your account to ensure that you’re funding the account regularly. 

Unfortunately, ABLE accounts aren’t for everyone — and they’re not free. 

Before signing up for an ABLE account, confirm that you’re eligible. And be sure you understand the investment fees, options, and rules associated with your account.

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