NEW YORK (MainStreet) — Congress has created a new tax-deferred savings account, available beginning in 2015, called the ABLE Account. ABLE stands for “Achieving a Better Life Experience.”

The ABLE Account, enacted as part of the “Tax Increase Prevention Act of 2014” passed at the end of 2014 to extend the expired “tax extenders” through December 31, 2014, is a savings vehicle for people who were diagnosed as blind or disabled before age 26.

The ABLE Account is similar to the Qualified Tuition Program (QTP) or Section 529 college savings plan, but instead of saving for college expenses you are saving for the education, housing, medical, transportation, and legal costs of a qualified disabled person.

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Anyone can contribute to an ABLE account, up to a maximum of $14,000 per year per beneficiary. Only one ABLE account is allowed for any qualified disabled individual. The money invested in the account will grow tax free. Contributions are not deductible, but distributions that are used for qualified expenses are tax free.

Qualified expenses include –

  • Education
  • Housing
  • Transportation
  • Employment training and support
  • Assistive technology and personal support services
  • Health care
  • Financial management
  • Legal fees
  • Funeral and burial expenses

Distributions in excess of qualified expenses will be subject to income tax and a 10% penalty surcharge. I expect the method for determining taxable distributions will be similar to the method currently used for calculating taxable distributions from a QTP.

The ABLE Account balance will not be counted as a resource or financial asset for determining eligibility for most federal assistance programs.

Like the Section 529 college savings plan, the designated beneficiary of the account can be changed to another qualifying disabled family member.

These accounts will be set up through state-run ABLE programs, with the individual states determining the types of investments offered and associated fees and costs. The tax act, signed into law on December 19, 2014, gave the IRS and the Social Security Administration six months to establish the specific certification and documentation criteria for determining eligibility. Once these rules are in place, the individual states will begin to initiate their programs.

As with any tax deferred savings or investment account, once the state programs have been established, the earlier in the year you make your contribution the better.

—Written by Robert D. Flach for MainStreet