Are IRA Distributions Taxable If You Are Disabled?

Monday, March 4th 2024

Financial planning and income security often entail two key elements, Individual Retirement Accounts (IRAs) and Social Security Disability Insurance (SSDI). An IRA provides tax advantages when saving for retirement; SSDI is a benefit program which pays benefits directly to disabled workers unable to work due to disabilities; one common question related to this topic involves contributing to both an IRA while receiving SSDI benefits simultaneously.

Understanding IRAs and SSDI is the starting point in answering this question, then proceeding further into their specifics, legalities, and strategies for individuals in similar circumstances.

Individual Retirement Accounts (IRAs)

An Individual Retirement Account, or IRA, enables individuals to make tax-deferred contributions toward their retirement savings tax free. There are different kinds of IRAs: Traditional and Roth, each offering specific tax advantages.

Traditional IRAs (1) allow pre-tax contributions that lower your taxable income in the year of contribution; however, distributions during retirement will be taxed as ordinary income and should therefore be treated as ordinary income when taxed as ordinary income.

Roth IRA (2) contributions, on the other hand, are made using after-tax dollars, so while this doesn’t offer immediate tax advantages it does allow for tax-free distributions during retirement provided certain criteria are fulfilled.

There are eligibility requirements in order to contribute to an IRA account, with earned income coming primarily from wages or self-employment being required as the foundation of earning power (this does not include investment income, pension benefits or annuities, nor Social Security payments such as SSDI benefits).

Social Security Disability Insurance (SSDI)

Social Security Disability Income is a federally run benefits program designed to assist those physically restricted in their ability to be employed due to disability. Funded through payroll taxes, SSDI is available only after having amassed sufficient work credits.

SSDI recipients rely on SSDI benefits to cover daily living expenses due to disability; unfortunately this means their source of earned income often cannot offset SSDI benefits. Therefore it’s critical that recipients understand how other financial planning strategies, like contributing to an IRA account can complement or supplement SSDI payments.

Can You Contribute to an IRA while on SSDI?

Now that we understand both IRAs and SSDI benefits, let us turn our attention to our question of contributing to an IRA while receiving SSDI benefits.

The simple answer is: It depends.

As previously discussed, one of the requirements of contributing to an IRA is having earned income; unfortunately SSDI benefits do not fall within this classification, therefore disqualifying you from contributing.

However, if you also receive Social Security Disability Income (SSDI), and have other sources of earned income beyond SSDI benefits alone, then an Individual Retirement Account can be contributed to. For instance if you can continue doing some type of work despite disability or have a spouse earning income then both incomes could count toward your maximum contribution for an IRA contribution.

Strategies for Contributing to an IRA while on SSDI

Now that we understand the rules, let’s consider some strategies for individuals on SSDI who wish to open an IRA account and contribute their earnings.

Spousal IRA contributions

Working spouses can contribute to their non-working spouse’s IRA as long as they complete joint tax returns. this is referred to in the field of “spousal IRA contributions”, with earned income being at minimum equal to the total contributions made on both parties on behalf of.

Partial work

The Social Security Administration (SSA) allows SSDI recipients to earn some income from work without jeopardizing their benefits – known as Substantial Gainful Activity or SGA). As of 2021, this amount stood at $1,310 monthly for non-blind individuals and $2,190 for blind individuals, although these figures are subject to annual adjustments. Any income generated within these limits could then be put towards funding an Individual Retirement Account or IRA.

Implications of Contributing to an IRA while on SSDI

Before investing in an IRA while on SSDI, it is crucial that one carefully considers all potential outcomes and implications.

Final Thoughts

Although SSDI benefits do not count as earned income for IRA contributions, individuals receiving SSDI may still have opportunities to save for retirement with other sources of earned income or by contributing through a working spouse. If any such circumstances apply to you then an IRA contribution might be possible.

Before contributing to an IRA, it is crucial that you carefully assess its potential implications on both SSDI benefits and taxes. Navigating these complex rules may prove daunting – professional assistance from financial advisors or tax specialists could prove essential in making an appropriate choice in light of your unique circumstances.

As financial landscapes continue to shift, it remains vital that individuals are well informed regarding how retirement savings strategies and benefit programs like SSDI interact. Accessing accurate, up-to-date information will allow you to maximize financial security during retirement years and lead to positive outcomes for their retirement years.

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