Personal Finance

Tax-advantaged accounts help children with disabilities

Able accounts for special needs children
Able accounts for special needs children

When Catherine Beck's daughter, Natalie, was born with Down syndrome, she knew her expenses would be exorbitant. "She would always need support, supervision, transportation, help for work and we really did need to save as much as we could," Beck said.

Catherine and her late husband, Stephen Beck Jr., shopped around for a savings plan and with limited options they started a special-needs trust for Natalie, but were taxed at a very high rate (trusts can be taxed at the highest federal rate of 39.6 percent).

The Becks became passionate about finding a more affordable alternative and were ultimately instrumental in the creation of the federal Achieving a Better Life Experience (ABLE) Act, which passed in 2014.

More commonly known as ABLE accounts, they are tax-advantaged savings accounts for individuals with disabilities and their families, which are modeled after state-sponsored 529 college savings accounts, and administered by individual states.

The money in ABLE accounts grows and can be withdrawn tax-free and the funds can be used for a variety of expenses, from housing to long-term health care, all without any limitations on the number of withdrawals.

Two years later to the day, the Beck's home state of Virginia launched its own ABLE savings program, ABLEnow, administered by the state's college savings plan, Virginia529, which has $57 billion in assets under management and 2.4 million in college accounts.

Virginia, along with Ohio, Tennessee, Michigan, Oregon, Florida, Kentucky and Nebraska, are among the first states in the country to offer ABLE accounts. At least a dozen more states are likely to follow by mid-2017, according to Christopher Rodriguez, the senior public policy advisor at the ABLE National Resource Center.

The Beck family
Catherine Beck

"Some will save for the very long term, for example a parent with a young child that will need many services in the future, but others will be more transactional, for those that need to access discretionary income every month," said Mary Morris, CEO of Virginia529, the agency that will administer the new ABLEnow program.

"The real beauty is that people can have bigger dreams for the future. Maybe they'll be able to save for a better wheelchair or something that will enhance their quality of life that Medicaid wouldn't cover," Morris said.

Beck also has long-term goals. Her daughter Natalie, now 17, aspires to be a nail technician and Beck plans to use the ABLE account to save for education and training as well as transportation to and from work down the road.

In Virginia, there is no minimum to open an account although other state's minimum amounts can vary. Contributors may also receive a state income tax deduction, depending on the plan (fees also vary).

Contributions, in general, can be made up to the annual IRS gift tax exclusion amount of $14,000 per taxpayer and qualified individuals can enroll in any state's program as long as that program accepts out-of-state residents. (To compare state plans, go to the ABLE National Resource Center.)

To be eligible, a beneficiary has to have been diagnosed with a qualifying disability by age 26. About 56 million people in America have a disability, according to the U.S. Census Bureau.