More than 56 million Americans have some form of disability, and in many cases the associated costs can be staggering. A disabled child can incur additional lifetime costs of $1.4 million, says Stuart Spielman, senior policy advisor and counsel for Autism Speaks, an advocacy organization based in New York City. That burden rises to $2.4 million for children with intellectual disabilities, says Spielman.

New tax-advantaged "ABLE" savings accounts, which states started rolling out this summer, allow relatives, friends and the disabled themselves to fund a lifelong financial lifeline. Money in the accounts grows tax-free and can be used to pay for assistive technology, employment training, equipment, legal fees, special housing and schooling, therapies, transportation, and other expenses.

ABLE accounts—named for the Achieving a Better Life Experience Act signed in late 2014—also help solve a problem that for years has discouraged disabled people and their families from saving. Until recently, if a disabled individual had assets of $2,000 or more, he or she could be ineligible for Supplemental Security Income (SSI), the federal income assistance for qualified disabled and low-income individuals. Disabled couples could be ineligible if they had $3,000 or more in assets. The new accounts allow SSI recipients to keep receiving their benefits while building a modest cushion for future needs.

Who's Eligible

ABLE accounts are not open to all disabled people. To qualify, a person must have had the disability before reaching age 26. (The diagnosis, however, can occur after that age.) "Anyone who qualified for Supplemental Security Income (SSI) before turning 26 will be eligible," explains Paul Jacobs, a certified financial planner with Palisades Hudson in Atlanta. "Others will need a doctor's letter certifying that the individual is blind or has severe functional limitations."

ABLE programs do not require that a doctor's certification be submitted—it's enough for either the disabled person or a surrogate to sign a statement confirming that he or she meets the eligibility requirements. But, as with an IRS audit, they'll need to submit the doctor's letter as proof if they are later questioned.

Not Exactly a 529 Plan

ABLE accounts are modeled after 529 college savings accounts; in fact, the IRS is calling them 529A accounts. Like 529s, ABLE contributions are invested post-tax in a selection of mutual funds chosen by the program; all future earnings are free of federal tax. States authorize their own plans, choose the investment companies that will offer the funds, and arrange for their administration. Depending on the state, residents may get a state tax break on ABLE account earnings and contributions, just as with 529 plans. 

But there are significant differences:

ABLE Account529 Plans
Account OwnershipThe disabled person is the owner and beneficiary of the ABLE account, even if others fund it. (Disabled adults can set up and fund accounts on their own, and name themselves as beneficiaries.)With 529 accounts, the person making the contributions is the owner of the account; he or she then chooses the beneficiary.
Number of Accounts AllowedA disabled person can be the beneficiary of only one ABLE account.In contrast, someone can be the beneficiary of any number of 529 plans, each set up by a different relative. (A disabled person can simultaneously be the beneficiary of an ABLE account and 529 plans.)
ContributionsAny relative can contribute to ABLE accounts.Only the account holder can contribute to a 529 account.
Maximum Annual ContributionFor ABLE accounts, the most you can contribute is the same as the federal gift tax exclusion, currently $14,000.For 529 accounts, there's no stated limit, though an individual's contributions that exceed $14,000 will be subject to the federal gift tax. States also can put a cap on the portion of that 529 plan contribution that's eligible for a state income-tax break.
Maximum BalanceThere is no mandated maximum allowable ABLE account balance, but if the balance exceeds $100,000, Supplemental Security Income eligibility can be halted until the balance drops. (Medicaid eligibility remains intact, regardless of account balance.)The maximum allowable 529 account balance is set by the sponsoring state; it's typically more than $100,000. In Wisconsin, for instance, the total amount that all 529 plans can hold for an individual beneficiary is currently $440,300.
Unused MoneyOnce the disabled person dies or no longer is considered disabled, the ABLE funds don't go back to the people who contributed them. A provision in Medicaid rules lets states reclaim what Medicaid paid out while the account was in force.Money in 529 plans that hasn't been used by one beneficiary can be used by a new beneficiary. As a result, there's a greater likelihood that the funds will all be spent eventually.

How to Set Up an ABLE Account

Four states—Florida, Nebraska, Ohio, and Tennessee—now have ABLE programs up and running. (Florida's program is only available to state residents.) If you want to set up a Nebraska, Ohio or Tennessee ABLE account, you can later roll over those funds to your own state's ABLE plan if or when it becomes available. The moved account still will be free of federal taxation.