Tax-advantaged ABLE accounts for disabled individuals

The Achieving a Better Life Experience (ABLE) Act of 2014 allows states to establish an ABLE program to assist persons with disabilities in building up tax–free (or in some cases tax–deferred) accounts to pay for qualified disability expenses. The accounts established under the ABLE program must meet the requirements of Sec. 529A.

ABLE accounts that are established under a qualified ABLE program are generally exempt from income tax but are subject to the unrelated business income tax of tax–exempt organizations (Sec. 529A(a)).

Law change: H.R. 1, P.L. 119–21, commonly known as the One Big Beautiful Bill Act (OBBBA), changed provisions for ABLE accounts, including permanently extending the enhanced contribution limitation, adding the ability to roll over amounts from qualified tuition plans (QTPs), and adding the ability to claim the saver’s credit on contributions, as well as allowing for rollovers from the new Trump accounts (Secs. 529A(b)(2)(B), 529(c)(3)(C)(i)(III), and 25B(d)(1), as amended by the OBBBA, and Sec. 530A(d)(4), as added by the OBBBA).

Requirements of a qualified ABLE program

ABLE accounts must be set up under a qualified ABLE program that is established and maintained by a state or state agency or instrumentality that (Sec. 529A(b)):

• Prohibits noncash contributions and contributions that exceed an annual limit (except for rollover contributions from another ABLE account). The annual contribution to an ABLE account is limited to the annual Sec. 2503(b) gift tax exclusion amount ($19,000 for 2025), plus an additional amount allowed to be made by the beneficiary.
• Imposes a 6% excise tax on excess contributions to an ABLE account.
• Provides separate accounting for each designated beneficiary.
• Limits changes in investments within the account to not more than twice per calendar year.
• Prohibits pledging any interest in the account as security for a loan.
• Provides safeguards to prevent excess aggregate contributions.

An ABLE account can be established in any state, regardless of where the designated beneficiary lives, if the state permits it (Sec. 529A(b)(1)).

Note: The limit on total aggregate contributions to a qualified ABLE account differs from state to state.

Designated beneficiaries

The designated beneficiary of an ABLE account is an eligible individual who established the account and is its owner. A designated beneficiary is limited to one ABLE account. An individual is an eligible individual for a tax year if, during that tax year, (1) the individual is entitled to benefits based on blindness or disability under the Social Security Disability Insurance program (Title II of the Social Security Act) or the Supplemental Security Income (SSI) program (Title XVI of the Social Security Act), and that blindness or disability occurred before the date on which the individual reached age 26; or (2) a disability certification for the individual has been filed with the IRS for the tax year (Sec. 529A(e)(1)).

Law change: The SECURE 2.0 Act of 2022 (SECURE 2.0), Division T of the Consolidated Appropriations Act, 2023, P.L. 117–328, raises the age limitation to 46 for years beginning after Dec. 31, 2025 (SECURE 2.0, §124).

A disability certification must certify that (1) the individual has a medically determinable physical or mental impairment that results in marked and severe functional limitations and that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months, or is blind, within the meaning of Section 1614(a)(2) of the Social Security Act; and (2) the disability or blindness occurred before the date on which the individual reached age 26 (age 46 if after Dec. 31, 2025). The certification must include a copy of the individual’s diagnosis, signed by a licensed physician (Sec. 529A(e)(2)(A)).

The IRS provides that a certification under penalties of perjury that the individual has the signed physician’s diagnosis, and that the signed diagnosis will be retained and provided to the ABLE program or the IRS upon request, is sufficient to satisfy the certification requirements previously mentioned (Regs. Sec. 1.529A–2(e)). A designated beneficiary can open an ABLE account by certifying, under penalties of perjury, that they meet the qualifications, including the receipt of a signed physician’s diagnosis, and that they will retain that diagnosis and provide it to the program or IRS upon request (Regs. Sec. 1.529A–2(d)). Eligible individuals with disabilities will not need to provide the actual written diagnosis when opening the ABLE account, and ABLE programs will not need to receive, retain, or evaluate detailed medical records.

Note: Conditions in the list of compassionate allowances conditions maintained by the Social Security Administration are deemed to meet the requirements for filing a disability certification if the condition was present and produced marked and severe functional limitations before the date on which the individual attained age 26 (age 46 if after Dec. 31, 2025) (Regs. Sec. 1.529A–2(e)(3)).

Federal income tax consequences to designated beneficiaries

Contributions: Contributions to an ABLE account are not deductible for income tax purposes. Except for a rollover contribution from another ABLE account (see later discussion), total annual aggregate contributions to an ABLE account are limited to the annual gift tax exclusion amount ($19,000 for 2025), plus an amount allowed to be made by the designated beneficiary (described below), and excess contributions are subject to a 6% excise tax (Secs. 529A(b)(2) and 4973(a)(6); Regs. Sec. 1.529A–3(e)). However, the excise tax will not apply if a corrective distribution of the excess amount is made within the tax year (Sec. 4973(h)(2); Regs. Sec. 1.529A–3(e)).

Note: After the overall limitation on contributions is reached, an ABLE account’s designated beneficiary can contribute an additional amount up to the lesser of (1) the federal poverty line for a one–person household for the prior year ($15,060 for 2024 for the 48 contiguous states and the District of Columbia) or (2) the individual’s compensation for the tax year (Sec. 529A(b)(2)(B)(ii)). Compensation, for this purpose, is defined the same as it is for individual retirement account deduction limits in Sec. 219(f)(1). To qualify to make an additional contribution for a particular year, the designated beneficiary must be an employee (including a self–employed individual) for whom no contributions were made to any of the following retirement plans: a defined contribution plan such as a 401(k) or profit–sharing plan, a 403(b) annuity sponsored by a tax–exempt organization or public school, or a 457(b) deferred compensation plan of a state or local government or a tax–exempt organization (Sec. 529A(b)(7)(A)). Note that the designated beneficiary or a person acting on the designated beneficiary’s behalf is responsible for ensuring that the requirements for the additional contribution are met and must maintain adequate records to do so (Sec. 529A(b)(2)(B), flush language).

Example 1. Designated beneficiary’s additional contribution amount: J is a disabled individual who is the designated beneficiary of an ABLE account. In 2025, J is employed, earns $20,000, and has no retirement contributions made on his behalf. In 2025, J’s parents contribute $19,000 to his ABLE account, which is equal to the annual gift tax exclusion. J can make an additional contribution of up to $15,060 (i.e., the lesser of (1) his compensation for the tax year ($20,000) or (2) the federal poverty line for a one–person household for the previous year ($15,060 for 2024)).

Note: ABLE account contributions made by the designated beneficiary to their account are eligible for the saver’s credit (Sec. 25B(d)(1)(D)).

Observation: Any person may make a contribution to an ABLE account. There are no adjusted–gross–income–based phaseout rules for making contributions to an ABLE account. However, for gift tax and generation–skipping transfer tax (GSTT) purposes, a contribution to an ABLE account on behalf of a designated beneficiary is treated as a completed gift to the beneficiary (Sec. 529A(c)(2)(A)).

Note: Regs. Sec. 1.529A–6(d) requires that a qualified ABLE program obtain the tax identification number (TIN) (i.e., the Social Security number) for each contributor to an ABLE account at the time a contribution is made if the program does not already have the contributor’s TIN on file. However, if the program has a system in place to reject contributions that exceed the annual contribution limit, the program need not collect the TIN of contributors at the time a contribution is made. If an excess contribution is deposited into a designated beneficiary’s ABLE account, the contributor’s TIN must be obtained.

Distributions: Distributions from ABLE accounts are tax–free to the extent they do not exceed the designated beneficiary’s qualified disability expenses for the year (Sec. 529A(c)(1)(B)(i)). Qualified disability expenses are any expenses related to the designated beneficiary’s blindness or disability and include expenses for education; housing; transportation; employment training and support; assistive technology and related services; personal support services; health, prevention, and wellness services; financial management and administrative services; legal fees; expenses for oversight and monitoring; funeral and burial expenses; and other expenses that are approved under IRS regulations (Sec. 529A(e)(5)). Qualified disability expenses also include basic living expenses and are not limited to items for which there is a medical necessity or that solely benefit a disabled individual (Regs. Sec. 1.529A–2(h)).

Distributions that exceed qualifying disability expenses are taxable and subject to a 10% penalty tax (Sec. 529A(c)(3)(A)). If distributions exceed qualified disability expenses, the amount otherwise includible in gross income (under the general Sec. 72 rules for annuities) is reduced by an amount that bears the same ratio to such amount as such expenses bear to such distributions (Sec. 529A(c)(1)(B)(ii)). In effect, distributions are treated as a pro rata share of the principal (contributions) and accumulated earnings in the account.

Example 2. Taxation of nonqualified distribution: During the current year, T receives a $12,000 distribution from an ABLE account of which he is the beneficiary. He uses $9,000 to pay qualified disability expenses; $5,000 of the $12,000 distribution represents earnings on the contributions to the ABLE account (the other $7,000 being a return of principal). Because 75% ($9,000 ÷ $12,000) of the distribution is used for qualified expenses, $3,750 ($5,000 × 75%) of the amount that would otherwise be taxable is excluded from income. Thus, of the $12,000 distribution, $10,750 ($3,750 of excluded earnings + $7,000 return of capital) is excluded from gross income, and $1,250 is taxable.

In addition, T must pay a $125 penalty tax (10% of the $1,250 taxable amount of the distribution).

Rollovers: Distributions can be rolled over tax–free within 60 days to another ABLE account for the benefit of the designated beneficiary or an eligible individual who is a family member of the designated beneficiary (Sec. 529A(c)(1)(C)(i)). For this purpose, a “family member” means, whether by blood or adoption, a brother, sister, stepbrother, stepsister, half–brother, or half–sister of the beneficiary (Regs. Sec. 1.529A–1(b)(12)). Any other transfer will be considered a gift by the designated beneficiary to the successor beneficiary, and the usual gift and GSTT rules apply (Regs. Sec. 1.529A–4(c)).

Note: Distributions from a Sec. 529 qualified tuition plan account can be rolled over to an ABLE account tax–free, provided that the ABLE account is owned by the designated beneficiary of the 529 account or a member of that designated beneficiary’s family (Sec. 529(c)(3)(C)(i)(III)). For this purpose, a “member of the family” means the designated beneficiary’s (1) spouse; (2) child or descendant of a child; (3) brother, sister, stepbrother, or stepsister; (4) father, mother, or ancestor of either; (5) stepfather or stepmother; (6) niece or nephew; (7) aunt or uncle; (8) in–law; (9) the spouse of any individual described in (2)–(8); and (10) any first cousin of the designated beneficiary. The rolled–over amount is counted toward the overall limitation on amounts that can be contributed to an ABLE account within a tax year, and any amount rolled over in excess of this limitation is includible in the distributee’s gross income.

Changes in beneficiaries: An ABLE account’s designated beneficiary can be changed without the change being treated as a taxable distribution, as long as the new beneficiary is an eligible individual who is a family member of the designated beneficiary (Sec. 529A(c)(1)(C)(ii)).

Death of a beneficiary: Upon the death of a designated beneficiary, amounts remaining in an ABLE account are first used to pay for the funeral and burial expenses and all outstanding qualified disability expenses of the designated beneficiary (Regs. Sec. 1.529A–2(o)).

Then, a portion or all of the balance remaining in the ABLE account of a deceased designated beneficiary is distributed to a state that files a reimbursement claim for benefits provided to the designated beneficiary under that state’s Medicaid plan. The payment of such a claim is limited to the amount of the total medical assistance paid for the designated beneficiary after the establishment of the ABLE account over the amount of any premiums paid to a Medicaid Buy–In program under any state Medicaid plan (Sec. 529A(f); Regs. Sec. 1.529A–2(o)).

Any remaining amounts in the ABLE account are distributed to the decedent’s estate or a designated beneficiary and are subject to income tax on the investment earnings but not the 10% penalty tax (Sec. 529A(c)(3)(B)).

Contributor

Patrick L. Young, CPA, is an executive editor with Thomson Reuters Checkpoint. For more information about this column, contact thetaxadviser@aicpa.org. This case study has been adapted from Checkpoint Tax Planning and Advisory Guide‘s Individual Tax Planning topic. Published by Thomson Reuters, Frisco, Texas, 2025 (800-431-9025; tax.thomsonreuters.com).