Can You Contribute to an IRA If You Are on SSDI?
SSDI does not permit contributions to an IRA account, but you can still invest in taxable brokerage accounts without incurring taxes when withdrawing earnings provided that they meet IRS guidelines.
Contributions to an Individual Retirement Account (IRA) must come from earned income such as wages, salaries, tips or any other forms of compensation that have been earned legally and taxed as earned income by your state of residency. Your Modified Adjusted Gross Income determines contribution limits.
Contributions are tax-deferred
IRAs are tax-advantaged retirement savings accounts that allow individuals and small businesses alike to invest their pre-tax dollars with pre-tax dollars in retirement accounts. There are various kinds of IRAs, such as traditional, Roth, SIMPLE IRAs. Your contribution limits depend on your income and tax filing status; additionally a self-directed IRA (SDIRA) allows access to a larger selection of investments.
The IRS sets limits for deductible IRA contributions based on your modified adjusted gross income and tax-filing status, although you may not be able to deduct all your contributions depending on whether or not either you or your spouse is covered by an employer-sponsored retirement plan. You can find more by using either the IRA Deduction Calculator available through IRS website or tax software like TurboTax; otherwise you will likely need to file Form 8606: Nondeductible IRA Contributions with your return as withdrawals tend to be taxed as current income.
Withdrawals are tax-free
Although SSDI doesn’t permit contributions to an IRA, you can still invest your earned income. For instance, say you make $400 a month driving with Lyft or Uber and this counts as earned income; therefore you could place this into a taxable brokerage account and invest it accordingly.
However, you could incur a 10% early withdrawal penalty from an IRA if you make any withdrawal before reaching age 59 1/2. This penalty will be in addition to regular income tax that would apply upon distribution.
However, there are exceptions to this rule: You may withdraw funds without incurring penalties when using them to buy, build or renovate a first home; unreimbursed medical expenses exceeding 7.5% of adjusted gross income; pay tax liens or satisfy divorce settlements; satisfy tax liens or satisfy divorce settlements or take out distributions due to special circumstances such as permanent and total disability.
You can invest in a Roth IRA
If you are receiving Social Security Disability benefits, Roth IRAs are an investment option to consider. But be careful not to exceed the annual maximum contribution limit set by the IRS; this limit can change over time. Also consider other forms of investments like annuities and brokerage accounts when making this decision.
Keep in mind, though, that SSDI payments don’t count as earned income and that your total adjusted gross income (MAGI) exceeds certain limits before contributing to a traditional IRA.
If you have another source of income such as part-time employment or consulting work, this should not impact your ability to contribute to an IRA. Just be sure to inform Social Security of what type of employment is being performed so they can adjust your monthly payments appropriately or you could risk losing benefits altogether.
You can invest in a Traditional IRA
No matter if you receive SSDI or another form of government assistance, investing in a Traditional IRA may provide tax savings opportunities. Here are some helpful tips that may be beneficial.
Contributions can be made with either pre-tax or after-tax dollars and will grow tax-deferred until age 59 1/2, when withdrawals will be taxed as current income. Traditional IRA contributions can help lower your adjusted gross income and qualify you for other tax incentives.
SSDI recipients can contribute money to an IRA without incurring the ire of the Social Security Administration (SSA), although they must remember that investments will be counted as income by the SSA and may limit how much can be kept in savings accounts, certificates of deposit or similar assets; however, annuities or brokerage accounts won’t fall into this category.
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