What Are ABLE Accounts and When Are They Used?

The ABLE account (or Achieving a Better Life Experience) program is likened to an Educational IRA with some differences.  An ABLE account can be set up for a Special Needs Individual who has had a disability diagnosis established before the age of 26.[1]


Special Needs Individuals who apply for disability benefits have to show that they have resources under $2k and any income that comes to them which puts them over that limit even by a dollar, could potentially trigger an ineligibility the following month.  Up to now, such individuals and their families could only set up First or Third Party Special Needs Trusts to hold any excess funds.  The funds could be used to pay for the special needs individuals’ expenses, subject to very strict limitations.  However, with the introduction of the ABLE account in NJ[2], families have another option for housing additional funds.  Like a First Party Special Needs Trust or d(4)(A) trust, contributions into this account are meant to supplement a special needs individual’s needs and so long as the rules for spending are strictly adhered to, the special needs individual can continue to receive government benefits without triggering an ineligibility.  Unlike a d(4)(A) trust though, the spending rules for ABLE accounts are a lot more flexible.  They can be controlled by the special needs individual and the account does not need to be set up by an attorney whereas a special needs trust agreement must be drafted by an attorney.   Moreover, the trustee of a special needs trust has to be somewhat financially savvy to ensure the trust files the proper tax filings each year and the strict distribution requirements are adhered to.


Only one account per individual is allowed but the special needs person as well as third parties can make contributions into this account.  Generally, ABLE accounts can accumulate up to a total of $400k and are subject to a yearly contribution of $15k/year; however, since NJ is a SSI state, for those who qualify for SSI, there is a $100k cap in an ABLE account.  Additionally, there is an income cap of $11,700 per year of how much a beneficiary can put into this account from his or her income.


NJ currently does not have its own program so those families looking to set an ABLE account for a special needs family member will have to look to Florida, Ohio, Illinois or other state that runs its own program.


Contributions into an ABLE account are not treated as gifts since money from the special needs individual can be placed in this account as well.


Withdrawals from this account are tax free so long as the funds are used for “qualifying disability expenses (or QDE).”  Additionally, excess income over the Medicaid threshold is disregarded so long as it is used for such QDE.  Fortunately, the definition of QDE is rather broad and can include expenses for housing, education, transportation, employment training, health and wellness, financial management, legal fees and more.


[1] A disability certificate from a doctor is kept on file and produced if there is an audit by the IRS

[2] NJSA 52: 18A-250