ABLE Accounts: When the Beneficiary Is No Longer Disabled

Takeaways

• ABLE accounts help individuals with disabilities save money without losing their ability to qualify for government benefits

• If a beneficiary is no longer considered disabled, they may need to transition their ABLE account to a different type of account or face potential tax implications, so it’s crucial to stay informed about the rules and options available.

What Are ABLE Accounts?

ABLE accounts, or Achieving a Better Life Experience accounts, are tax-advantaged savings accounts designed for individuals with disabilities. They allow beneficiaries to save money, tax-free, without losing eligibility for government benefits like Medicaid and Supplemental Security Income (SSI). (As of 2025, the annual contribution limit for an ABLE account is $19,000.)

Contributions to ABLE accounts can be made by the beneficiary, family, or friends. The beneficiary can use the funds for qualified expenses such as education, housing, and health care. This financial tool empowers people with disabilities to achieve greater independence and improve their quality of life while maintaining essential support from public assistance programs.

When the Beneficiary Is No Longer Considered Disabled

An individual, who had been once diagnosed as someone with special needs, may at some point in the future no longer qualify as “disabled” according to IRS regulations. The individual’s condition might have improved through remission or medical treatment, for example, or perhaps the original diagnosis was inaccurate.

When the beneficiary is no longer considered disabled, the status of the ABLE account may change. Understanding the implications of this transition is important.

The funds in the account can still be used for qualified expenses, but the tax advantages may be affected. Additionally, the account may be subject to different rules regarding contributions and withdrawals. Beneficiaries should consult with a financial advisor or special needs planning attorney to navigate these changes effectively and ensure they continue to manage their finances in a way that supports their needs.

For a closer look at what happens to an ABLE account in such cases, check out answers to the following key questions to understand the timetable and options available:

Does the beneficiary still have access to their ABLE account?

Yes, but only for a limited time. The account can remain open and active until the end of the calendar year in which the change in status took place. Up until that date, contributions can be added to the account and distributions made from it, as if the beneficiary were still eligible.

What happens to the ABLE account going forward?

At the end of that calendar year, the beneficiary is no longer eligible and loses the tax-favored benefits of the ABLE account. Contributions can no longer be made to the account, and any withdrawals are considered nonqualified distributions. Such withdrawals may also affect the person’s ability to qualify for government benefits, such as SSI.

Will distributions from the ABLE account be subject to income tax once the beneficiary is no longer qualified?

Any distributions that include returns on the account, such as investment growth or interest and dividend income, are subject to federal income taxes. Note that the tax on such distributions is increased by 10 percent over the tax rate that would normally apply. State and local taxes may also be a factor.

What are some strategies for spending down money during the calendar year before the ABLE account becomes inactive?

Once all the money is withdrawn, the ABLE account is closed. However, the money must be spent according to IRS regulations to avoid being subject to income taxes or the risk of losing eligibility for government benefits. One strategy is to spend as much of the funds as possible, before the end of that calendar year, on qualified disability expenses (QDEs) such as employment training and support, housing, transportation, and assistive technology.

Can state governments claim funds from an ABLE account after the beneficiary’s death, even if that person was deemed no longer eligible because of medical improvement and the account is inactive?

Yes, if that person, while disabled, also received money from state-run Medicaid programs. For this reason, people who have lost their eligibility because of medical improvement might choose to spend down and close their ABLE accounts within that first calendar year rather than keep it inactive going forward.

Additional Resources

If you or a loved one has had a change in disability status that affects an ABLE account, speak to your special needs planner.

For further reading on special needs planning, check out the following articles:

• Special Needs Planning and Retirement Benefits
• College Savings for Students With Special Needs
• Special Needs Families: Beware When Designating Beneficiaries