Can You Contribute to an IRA While on SSDI?
Even though lifting traditional IRA contribution age limits has opened up options for older individuals, they still face restrictions; contributions must come from earned income rather than Social Security Disability benefits.
Income you earn as wages, salary or fees does not count toward retirement income and pensions are excluded in this calculation.
Contributions are tax-free
Assuming you meet certain rules, in general you may invest your earned income in an IRA while receiving disability payments. But before doing so, make sure that the earnings do not exceed $1350/month while receiving SSDI (or $2260 if blind). Exceeding this limit constitutes substantial gainful activity (SGA), requiring withdrawal from your IRA which will trigger income taxes and penalties for your earnings.
Government restrictions also limit how much you can contribute to an IRA account based on your modified adjusted gross income (MAGI). Deductions start to phase out at certain amounts before being eliminated entirely as soon as you reach certain filing status thresholds. Certain expenses such as trustee’s fees, broker commissions and trustee expenses can also be deducted; but keep an eye out – too many expenses can cause your MAGI to go beyond its limit and you won’t be eligible to contribute anymore!
You can invest in a variety of assets
Individual Retirement Accounts (IRAs) enable investors to diversify their investments across a range of assets. You have three IRA options available to them – traditional, Roth and SEP IRAs. An IRA can hold cash, investments in stocks or mutual funds as well as property such as real estate. Certain restrictions do apply however – for instance no self-dealing is allowed, only securities from publicly traded companies can be invested in an IRA and no collectibles should be included as investments in an IRA.
However, Social Security Disability benefits do not count towards MAGI which determines contribution limits to an IRA. You may still invest your SSDI money through other channels like taxable brokerage accounts or annuities instead; but always consult a tax expert first so they can advise if this option fits with your goals and needs.
You can withdraw your funds tax-free
Permanent and totally disabled individuals may withdraw their IRA funds without incurring a penalty, however distributions must occur between unemployment compensation payments or before age 59 1/2 (unless an exception applies).
If your IRA is traditional or Roth, its distributions can be used to cover unreimbursed medical expenses and health insurance premiums for you and your immediate family members, as well as funding qualified higher education expenses for themselves and family.
Choose the direct rollover option to avoid withholding and ensure that 20% of your eligible distribution will not be withheld from its proceeds by your payer. However, make sure that this decision is made within 30 days of being notified about withholding by contacting the plan administrator for more details on this choice.
You can make penalty-free withdrawals
Withdrawals made prior to reaching age 59.5 can incur a 10% penalty and income tax liability, unless you meet certain exceptions. Unfortunately, the rules can be quite complex.
Disability benefits count towards your MAGI (Modified Adjusted Gross Income), and this could reduce the amount you can contribute to a traditional IRA. Also, any deductions taken out from a 401(k) or 403(b) plan have an impactful influence on IRA contributions.
Your IRA allows for penalty-free withdrawals when necessary for first home purchases, medical expenses that exceed 7.5% of MAGI or job loss expenses exceeding health insurance premium payments. Furthermore, its “substantially equal periodic payment” exception allows withdrawals based on life expectancy or beneficiary needs; any withdrawals caused by tax levies won’t incur a 10% penalty.
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