Can You Contribute to an IRA If You Are on SSDI?
IRAs can be an excellent way to save for retirement. Offering tax advantages and growing tax-deferred, they allow investors to save more tax effectively for their golden years – but cannot be accessed before reaching age 59 1/2 without incurring penalties.
Typically, only earned income qualifies for an IRA account with the IRS. Even though you may work while collecting disability benefits, it’s essential that earnings do not go beyond the allowed limits or else an account could become ineligible.
Contributions are tax-deductible
IRAs can be great ways to save and invest your money, but you should carefully consider their effects on disability benefits. While you are entitled to SSDI benefits, any earnings must remain below Social Security’s substantial gainful activity (SGA) limit or else they risk forfeiting them altogether.
Similarly, if you own multiple IRA accounts, they must all meet government deduction limits. You should also be mindful that contributions made to an IRA account are limited by the taxable compensation for that year; other account types (SEP and SIMPLE IRAs) have their own restrictions and limits.
The IRS defines earned income as any money you receive from working for someone or running your own business or farm, including Supplemental Security Income and Social Security Disability Insurance payments which qualify as earned income and can be contributed to an IRA account.
Withdrawals are tax-free
If you collect SSDI and also earn additional earned income, you can still contribute to an IRA account. However, due to IRS restrictions, there is an annual maximum contribution limit per account of $6,500; that limit would only allow contributions totalling this much in 2022.
As you make decisions to invest your income, traditional and Roth IRAs offer different tax rules; therefore, seeking professional guidance would be wise. In addition, rollover IRAs allow funds from another tax-advantaged account to be transferred easily into another IRA account.
When withdrawing funds before reaching age 59 1/2, taxes and a 10 percent penalty will apply unless an exception applies. To avoid the penalty altogether, use your withdrawal to buy a home or cover higher education expenses; as well as use it pay health insurance premiums – an exception to the normal rule prohibiting this method of payments with disability checks.
Contributions can be made from any source of income
While disability payments don’t count as earned income under IRS rules, people on SSDI are allowed to generate some side income and contribute it into an IRA. Your ability to generate side income while on disability is limited by Social Security Administration’s substantial gainful activity (SGA) limits; for 2022 this limit stands at $1350 monthly and any more earnings could cause your benefits to stop coming in.
However, the IRS also recognizes other forms of compensation as earned income, such as alimony, child support and education loans. Military members receiving combat zone pay may even be able to use this excludable pay as an IRA contribution.
There are two primary types of Individual Retirement Accounts (IRAs). Savings IRAs are FDIC-insured accounts that provide modest annual returns with no custodial charges or annual fees attached – however they don’t allow for tax savings like investment IRAs do.
Taxes on withdrawals
Those receiving Social Security Disability Insurance may contribute to an IRA; however, tax penalties could apply on withdrawals from this account. To minimize potential tax penalties, planning carefully is key.
Contributions to an IRA must come from compensation or earned income; disability benefits do not count towards earning income and can therefore be excluded from your contribution limit if they’re reported on Form W-2 or 1099R.
Income taxes apply to distributions from IRAs, with certain exceptions such as using them to purchase your first home, pay medical expenses or buy life insurance policies. Furthermore, those under 70 can use a life expectancy table to calculate their required minimum distribution (RMD), although expert guidance should always be sought as using incorrect tables could incur penalties and reduce future RMD amounts.
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