How to save for your child who may need life-long care

  • ABLE accounts were established for individuals with significant disabilities, who will need lifelong financial support.
  • They’re similar to 529 education savings accounts, with a few differences.
  • Now you can roll over funds from a 529 and contribute more money, thanks to the 2017 tax bill.
93336417
Warren Photography | Getty Images

If you have a family member with a significant disability, you may be wondering how to care for her or him.

Special needs trusts are an option but they often require substantial amounts of money — as much as $100,000 up front — and the services of a lawyer. A less expensive way of establishing a trust for a family member with special needs is the pooled trust, available to people with modest assets.

Whether or not you have one of these special needs trusts, the ABLE account is another way to set money aside. Not only is it less expensive, it’s much easier. ABLE accounts are tax-advantaged savings accounts for individuals with disabilities and their families.

“Small amounts of savings over time make the savings more accessible for more people,” said Todd Sensing, a certified financial planner and founder of FamilyVest in Destin, Florida.

An ABLE account lets a designated beneficiary have up to $100,000 in assets without touching his or her ability to access SSI disability benefits. The funds in these accounts can be used for education, transportation, legal fees and quality-of-life purchases.

"Don’t worry about the perfect plan. Small amounts of savings over time make the savings more accessible for more people." -Todd Sensing, CFP and founder, FamilyVest

Anyone can make contributions to the account, up to a total of $15,000 a year.

“Another source of funds could be the settlement of a lawsuit,” Sensing said. “It could be a structured settlement of $15,000 [into the ABLE account] at a time,” Sensing said.

The advantage of an ABLE account is how inexpensive and easy it is, experts say.

“For the most part, you can open it on your own,” Sensing said.

Don’t worry about the perfect plan: “You’re not going to have all the money [all at once], but small amounts of savings over time make the savings more accessible for more people," Sensing said.

Established in 2014, ABLE accounts are set up on the state level. Not all states offer one. Connecticut and Hawaii, for example, have adopted the Act but the accounts are not yet available.

Unlike a special needs trust, which would classify food and housing costs as income, an ABLE account can be used to pay for food and housing.

Experts point out that you have control over how the money is invested, with most states offering several investment options, including aggressive as well as low-risk funds.

Most states also offer an option that is no risk and FDIC-insured, sometimes called a BankSafe investment option.

The ABLE National Resource Center offers an easy way to compare states and features at a glance. Choose the “state review” tab to compare three states at a time, or see one specific state.

Changes from the tax bill

Last year’s Tax Cuts and Jobs Act increased the annual amount of contributions you can put in an ABLE account, to $15,000, in line with the increased gift tax exemption.

The tax bill also changed several other features of the accounts.

“Up until the previous year, the individual wasn’t able to make contributions through earnings on top of that annual contribution limit,” Sensing said.

Now, the account can be funded additionally through paycheck contributions from beneficiaries who are employed. The annual limit for these individuals is $12,060.

The tax bill also now allows the ABLE account’s designated beneficiary to claim the saver's credit for contributions.

Rollovers from a 529 account

If you set up a 529 college savings account for your child and now want to use those funds in an ABLE account, you can roll them over. You’re still limited to an annual contribution of $15,000, though.

Many accounts have a debit card

As the account reaches its asset limit and you’re no longer focused on accumulating assets, you’ll want an easy way to spend down, according to Sensing.

Each state varies in its ABLE account structure. Some, including Alaska, Florida, Illinois and Rhode Island, do not offer a purchase or debit card. Since you’re not limited to opening the account in your home state, if that’s an important feature, choose an ABLE account in a state that has this.

No Social Security? No problem

As long as the individual meets the requirement of having a disability before age 26, he may still be eligible to open an ABLE account. The person needs to meet Social Security’s definition of having a significant disability and receive a letter from a doctor.

(Editor’s note: This story has been updated to reflect more specific details from the IRS in regard to ABLE account contributions.)

More in Personal Finance:

Good financial habits may not make you rich. Here’s what will

When you have much less time to plan your finances than you thought

Instant payments grow up. They’re not just for millennials any more