In 2015, taxpayers were introduced to two new tax-friendly savings accounts that are designed for individuals who don’t earn an abundance of income, including low-income families which have members that are both young and disabled. ABLE (Achieving a Better Life Experience), and myRA (my Retirement Account) savings accounts were made available in January and November 2015, respectively. Let’s look at the benefits of the myRA first.
myRA
On November 4, 2015, the starter retirement savings account known as a myRA became available to individual taxpayers. The myRA is a Roth IRA that invests in a new U. S. Treasury retirement savings bond, and therefore is an investment backed by the United States Treasury. These bonds do not lose money and the account safely earns interest at the same rate as investments in the Government Securities Investment Fund, which usually has an average annual return around 3%.
The myRA allows low-income earners to open a retirement savings plan with minimal automatic contributions and no fees. It is designed for people without access to employer-sponsored retirement savings such as the Thrift Savings Plan (TSP) or the FERS retirement system.
The myRA is structured like a Roth IRA where account holders contribute money after income taxes are paid while any investment gains and withdrawals are both tax-free and penalty-free. Because younger workers in relatively low tax brackets receive less benefit from the tax deductions available for contributions to regular IRAs, Roth IRAs better serve the younger and lower-income workers to which the myRA program is targeted.
A taxpayer may contribute up to $5,500 per year (or $6,500 per year for individuals 50 years of age or older at the end of the year). Annual and lifetime contribution limits and annual earned income limits apply, as do conditions for tax-free withdrawal of interest. The money saved in a myRA is movable from one employer to the next making it very advantageous for long-term investment. When the myRA account reaches $15,000, the balance must be transferred to a Roth IRA at a financial institution, where contributions and investment may continue, but it may not be rolled over to a TSP account.
ABLE
The Achieving a Better Life Experience, or ABLE, account option became available Jan. 1, 2015. This account resembles popular state-run 529 college savings plans and is designed to help people with disabilities and their families save and pay for disability-related expenses. Contributions to an ABLE account are not tax-deductible, but withdrawals for qualified expenses are free from federal taxation.
The total annual contributions by all participating individuals, including family and friends, is $14,000. Under current tax law, $14,000 is the maximum amount that individuals can make as a gift and avoid the payment of any taxes, which is the gift tax exclusion. The total limit of contributions over time to an ABLE account will be subject to individual state limits for education-related 529 savings accounts. Many states have total limits over $300,000. New York’s limit is $375,000.
Contributions to an ABLE account are not tax-deductible, but all investment earnings remain untaxed as long as money taken from the account is used for “qualified disability expenses.” A “qualified disability expense” means any expense related to the designated beneficiary as a result of living a life with a disability. These include education, housing, transportation, employment training and support, assistive technology, personal support services, health care expenses, financial management and administrative services and other necessary expenses to maintain health, independence, and quality of life. Thus, expenses for medical treatment, education, tutoring and job training, special-needs transportation, assistive technology, and housing legal and administrative fees will probably qualify.
Similar to education 529 plans, taxes apply if money is withdrawn from an ABLE account for something other than qualifying expenses. Usually, the beneficiary will have to pay income taxes on the portion of the withdrawal that consists of investment earnings, as opposed to contributions, and a 10% tax penalty will apply.
A smart taxpayer will keep meticulous records to prove that expenses are qualified. This is mandatory after the Treasury Department recently stated in November, 2015 that states do not have to scrutinize expenses but beneficiaries will be required to maintain documentation indicating that a particular cost is a “qualified disability expense.”
A knowledgeable and experienced tax attorney is necessary to assist in understanding the requirements for opening investment accounts such as myRAs and ABLEs. If you have questions about myRAs or ABLEs, call THE TAX EXPERTS AT THE Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation call 212-490-0704.
