For the last 12 years, Lisa Fruscella has been touched by the joys of parenthood as the mother of 2 girls. But she's also felt the worry of wondering about her children's financial future. That's because Fruscella, a Fidelity employee who lives outside of Boston, has a 12-year-old daughter with Down syndrome. And like many families of children with a disability, Fruscella relies on state and federal disability benefits to help with the development of her daughter, Samantha.
Unfortunately, common financial planning strategies, like saving money in the child's name, can jeopardize those needs-based benefits. As a result, many families have sought out strategies that avoid such pitfalls, but in the process they may limit their ability to save tax-efficiently for their child's future.
Enter the ABLE account, a tax-advantaged savings plan, which was created by Congress in 2014 to help working adults with disabilities as well as families caring for children or adults with disabilities. A key purpose of this plan is to help families save in the name of their special needs children without jeopardizing other critical financial benefits and programs that may be available to help their children. According to federal law, individuals lose eligibility to certain federal disability benefits if they have more than $2,000 in assets. But by saving in an ABLE account, you can shield your contributions from that $2,000 limit. What's more, after-tax contributions to these accounts grow tax-free as long as withdrawals are used for qualified disability expenses.
"Before ABLE accounts, the main financial planning option for families was a special needs trust," says John Boroff, director of retirement and college leadership at Fidelity Investments. "But until the ABLE accounts were created, there was no tax-advantaged way for a family to save for their child."
Help for families
The emergence of ABLE accounts is presenting a new—and welcome—planning option for people like Fruscella, a finance director in Fidelity's Asset Management division in Smithfield, Rhode Island. For the first few years after Samantha was born, Lisa and her husband, Ed, coped with a series of medical challenges, including open-heart surgery when Samantha was 2½ and treatment with a feeding tube that supplemented her eating until age 4½. Samantha has also had speech therapy, occupational therapy, and physical therapy since shortly after her birth. "There was a lot to handle," says Fruscella. "We were worried about Samantha's development, and we also had to monitor significant medical issues and manage the costs of all the medical procedures and services."
Fortunately, the Fruscellas' financial life wasn't upended by Samantha's special needs. Health insurance covered the medical procedures, and the family tapped a Dependent Care Flexible Spending Account to pay for a nanny because Samantha wasn't a candidate for traditional day care. Regional organizations and state and federal programs have also provided various services to aid in Samantha's development.
Not knowing what the future may hold for her daughter when she reaches adulthood and may have to rely on federal benefits, Lisa Fruscella set up a brokerage account in her own name to save and invest for Samantha. "I knew that a traditional 529 plan wasn't an option, because it's unlikely Samantha will go to a traditional accredited college," she says. "But I wanted an account where we could put money aside for Samantha, and where her grandparents could contribute money."
"They always ask what the girls want for Christmas and their birthdays, but Samantha and her 10-year-old sister Serena already have plenty of stuff. When Serena was born, we set up a 529 plan to save for her college expenses. Her grandparents have been able to help fund it, and now Samantha will also have a savings plan of her own that we contribute to and where her grandparents can also contribute."
Inside the ABLE account
ABLE accounts have a lot to offer the Fruscellas and other families of children with a disability. These accounts give families a way to save in the name of their child, while allowing the same kind of tax-advantaged growth as 529 college savings plans. "An ABLE account is both a wealth accumulation tool and a financial planning tool," says John Nadworny, the father of a 26-year-old son with a disability and co-founder of Special Needs Financial Planning, a financial advisory firm in Winchester, Massachusetts.
Here's how ABLE accounts work: Families can open an account for the benefit of a child with a disability who meets eligibility requirements or for a significantly disabled adult who experienced the onset of the disability before turning 26. Eligibility follows the guidelines and definitions for disability established by the Social Security Administration.
An ABLE account is owned by the person with a disability and each individual is limited to ownership of one ABLE account. If the eligible individual is a child or is unable or unwilling to manage the account, a person with signature authority can open and manage the account for the benefit of the eligible individual. The person with signature authority must be the parent or guardian of the eligible individual or have power of attorney for them.
ABLE accounts are funded with after-tax contributions so there is no federal tax deduction for contributions. Contributions grow tax-free and withdrawals are also tax-free as long as they are used for qualified disability expenses. The IRS defines qualified disability expenses broadly—they may include rent, food, transportation, education and employment training, health care, and personal support services.
"An expense generally qualifies if it's for the benefit of the account owner and helps improve or maintain quality of life, health, and basic living," says Bernhardt. "Many common expenses fall under these categories."
Anyone can contribute to an ABLE account, making it easy for friends and extended family members to offer financial support. "In the past, families of children with special needs were sensitive to receiving gifts that might jeopardize the child's eligibility for disability benefits," says Nadworny. "An ABLE account offers a great opportunity for friends and family to make financial gifts." Many states offer ABLE accounts, and some also offer tax advantages for in-state residents. The annual aggregate contribution limit for an ABLE account is $15,000. The account balance can grow without limitation, but contributions aren't allowed once the account balance reaches a certain maximum contribution limit, often over $300,000, depending on the ABLE plan.
Additional funding for the account can also come from a designated beneficiary who works and has employment income. They can contribute up to the $15,000 regular contribution limit plus the lesser of 100% of their employment income or an amount equal to the federal poverty level as defined by the Department of Health and Human Services.
People considering an ABLE account need to be aware of its drawbacks as well. ABLE accounts with balances over $100,000 result in a suspension in federal Supplemental Security Income (SSI) benefits. And if the plan's beneficiary dies, and they had received Medicaid benefits during the time the ABLE account was open, the state can make a claim for reimbursement from assets in the beneficiary's ABLE account. Another concern: Withdrawals to pay for non-qualified expenses are subject to tax and a 10% penalty on the earnings.
Making the most of an ABLE account
Like most financial planning strategies, the right approach for using an ABLE account differs from family to family. For example, some families may be vigilant in keeping the account's balance below $100,000, while others may choose to accumulate as much as possible in the account to employ the plan's tax advantages.
The process of accessing money from an ABLE account varies. Some plans offer the use of a pre-paid debit card that can be loaded with funds from the account. Fidelity allows funds to be transferred directly from an ABLE account into a Fidelity® Cash Management Account, which offers a debit card, reimbursements for ATM withdrawals, and free checkwriting.
"When money gets taken out, it doesn't need to be spent immediately," says Bernhardt. "It can be moved out of an ABLE account and into another account. These transferred funds won't count against the thresholds for federal benefits as long as the ABLE account is still open and you have a firm intention of using that money for a qualified disability expense." One exception: In order to not impact SSI benefits, withdrawals for housing-related expenses must be spent in the same month the funds were withdrawn from the ABLE account.
Tip: Consider taking advantage of a tax provision that became available in 2018 allowing the ability to roll up to $15,000 per year from an existing 529 college savings plan into an ABLE account.
ABLE accounts also provide a place for adult children with special needs to save money they have earned. Lisa Fruscella calls this facet of the accounts "empowering" as the Fruscellas look toward 12-year-old Samantha's future. "Someday Samantha will have money in her own name, and as she works, the money she earns can go into this account," she says. "I hope that we'll be able to work with Samantha to create a budget, and help her do many of the things that someone her own age would be doing at that time/"
Next steps to consider
Call 844-458-2253 to speak with an ABLE account specialist.
Find out what constitutes a significant disability.
Read Viewpoints on Fidelity.com: Estate planning for special needs dependents
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