Achieving a Better Life Experience Act, ABLE, accounts help people with disabilities and their families save and pay for disability-related expenses.
They allow states to create tax-advantaged savings programs for eligible people with disabilities, and distributions are tax free if they are used for qualified disability expenses.
Regulations issued on Oct. 1 2020, allow eligible individuals to put more money into ABLE accounts and roll money from qualified tuition programs — 529 plans — into ABLE accounts. Certain contributions made to ABLE accounts by low- and moderate-income workers now may qualify for the Saver’s Credit — a tax credit for eligible contributions to an ABLE account.
Tax-free distributions for qualified expenses
Though contributions aren’t deductible, distributions, including earnings, are tax free to the designated beneficiary if they are used to pay such qualified disability expenses as:
- Housing
- Education
- Transportation
- Health
- Employment training and support
- Assistive technology
- Personal support services
The Achieving a Better Life Experience Act (ABLE) became law in 2014 and has been updated since then. The tax legislation in 2017:
- Increased the amount of contributions allowed to an ABLE account and added special rules for the increased contribution limit.
- Allowed an ABLE account designated beneficiary to claim a Saver’s Credit for contributions to the account.
- Allowed rollovers in limited amounts from a 529 qualified tuition program account of the designated beneficiary to the ABLE account or family member.
New guidance for ABLE accounts
The new 2020 regulations provide guidance on:
- Gift and generation-skipping transfer tax consequences of contributions to an ABLE account.
- Income, gift and estate tax consequences of distributions from and changes in the designated beneficiary of an ABLE account.
- The ability to roll over funds from a designated beneficiary’s 529 plan to an ABLE account for the same beneficiary or a family member. Rollovers from 529 plans and any contributions made to the designated beneficiary’s ABLE account (other than certain permitted contributions of the designated beneficiary’s compensation) cannot exceed the annual ABLE contribution limit.
Regulations provide guidance on the record-keeping and reporting requirements of a qualified ABLE program as well.
In addition to the annual limit of $15,000, a designated beneficiary who works also may contribute his or her compensation up to the poverty line amount for a one-person household, but not if his or her employer contributed to a:
- 401(a) defined contribution plan or a 403(a) annuity contract.
- 403(b) annuity contract.
- 457(b) eligible deferred compensation plan.
ABLE programs use Form 1099-QA, Distributions from ABLE Accounts, and Form 5498-QA, ABLE Account Contribution Information, to report relevant account information annually to designated beneficiaries and the IRS. Instructions are available on both forms.
Count on KRS CPAs
Contact us if you have any questions about the ABLE provisions and how you can take advantage of them.