Can an ABLE Account Be Funded Directly From an RMD Account?

This is an excellent and common question for individuals and families managing finances for someone with a disability. The short answer is: No, you cannot directly transfer funds from a Required Minimum Distribution (RMD) account to an ABLE account via a direct deposit.

Here’s a breakdown of the rules in a user-friendly way to help you understand why, along with the correct way to handle this situation.

The Key Difference: What an RMD and an ABLE Contribution Are

• Required Minimum Distribution (RMD): An RMD is a taxable withdrawal you are required to take each year from a retirement account — like a traditional individual retirement account (IRA) or 401(k) — after you reach a certain age. The Internal Revenue Service (IRS) sees this as income, and it is fully taxable.
• ABLE Contribution: A contribution to an ABLE account is a deposit of new money into the account, subject to an annual limit. Contributions can come from various sources, including the account owner, family, and friends.

Why a Direct Transfer Isn’t Allowed

The IRS and Social Security Administration (SSA) have strict rules for how different types of accounts interact.

1. Taxable event: When you take an RMD, it’s considered a taxable distribution from your retirement account. The IRS requires you to report this as income for that tax year. A direct deposit would bypass this taxable event, which is not permitted.
    
2. Contribution limits: ABLE accounts have an annual contribution limit (tied to the federal gift tax exclusion). RMDs are not considered a “contribution” in the same way as a deposit of new, untaxed money. The money from an RMD is already considered a withdrawal from a separate, regulated account.

The Correct Way to Fund an ABLE Account with RMD Money

The process is a two-step transaction:

1. Take your RMD: First, you must take the RMD from your retirement account. The funds will be distributed to a nonretirement account, such as a checking, savings, or brokerage account. This withdrawal is a taxable event, and you will receive a tax form (like a 1099-R) from your financial institution.
    
2. Make an ABLE contribution: Once the RMD funds are in your checking or savings account, you can then contribute that money (or any portion of it) to the ABLE account. This contribution must be within the annual ABLE contribution limit.

Example:

• You have a $10,000 RMD from your IRA.
• You withdraw the $10,000 and deposit it into your bank account.
• You then write a check or make an electronic transfer of up to the annual ABLE contribution limit to the ABLE account.

Important Considerations for People With Disabilities

This two-step process is crucial for several reasons, especially for individuals receiving means-tested government benefits like Supplemental Security Income (SSI) or Medicaid.

• Impact on benefits: The RMD itself is considered income when it’s withdrawn and deposited into a person’s checking or savings account. This can affect eligibility for certain benefits.
• ABLE account protection: However, once the funds are contributed to the ABLE account, they are disregarded as a resource up to a certain limit ($100,000 for SSI). This is the primary benefit of the ABLE account — it allows individuals to save money without losing essential government benefits.

In summary, while you can’t set up a direct deposit from an RMD account to an ABLE account, you can use the funds from your RMD to make a contribution to an ABLE account after the RMD has been properly withdrawn and reported as taxable income. Always consult with a financial advisor or a special needs planner to ensure you are following the rules and making the best financial decisions for your specific situation.