Can You Contribute to an IRA If You Are on SSDI?
An Individual Retirement Account (IRA) is a tax-deferred investment vehicle. Contribute to either a traditional or Roth IRA to avoid being affected by income limits for Social Security benefits. Distributions from these accounts may also be tax-free if they’re used for specific purposes – like home purchases, education costs and uninsured medical bills.
Contributions are tax-deductible
Contributions to an IRA are only tax deductible if they come from earned income, such as wages, salaries, tips, bonuses and commissions from employment or earnings from self-employment. It does not include investment income such as dividends or investment interest and it does not cover Social Security disability payments, union strike benefits or long-term disability payments; it does however exclude the present value of future pension benefits.
SSI recipients must pass a resource test in order to be eligible for assistance, with assets including their MAGI (modified adjusted gross income). It’s therefore crucial that they know whether pension or other retirement assets will affect their eligibility for assistance.
SSDI beneficiaries may still contribute to an IRA, though they must be careful with how much they deposit each year and ensure they do not go beyond IRS contribution limits. They will also need to start taking required minimum distributions at age 73 instead of 72 as per previous years.
You can withdraw money penalty-free
If you are total and permanent disabled, withdrawals from your IRA can be taken without penalty. Withdrawals may also be used for emergency medical expenses or health insurance premiums that become due. Be careful to work only limitedly as this could disqualify you from receiving SSDI benefits; though you can earn some income through work while collecting SSDI; the substantial gainful activity (SGA) limit set by Social Security should not be exceeded.
Before reaching age 59 1/2, any contributions you make to an IRA will incur income taxes as well as a 10% penalty fee on distributions taken prior to that age.
However, there are exceptions to this rule; you may withdraw up to $10,000 penalty-free in order to cover costs related to purchasing your first home and education expenses.
You can invest with a Roth IRA
If you are disabled and able to work, an IRA could be beneficial. There are certain restrictions you should keep in mind though; you shouldn’t invest more than your total earned income since any excess investment may incur penalties from the IRS and may disqualify you for receiving Supplemental Security Income benefits (SSI).
Your contributions to a Roth IRA depend on both your modified adjusted gross income (MAGI) and IRS-set contribution limits, which vary year to year. However, if your MAGI exceeds $125,000 as an individual or $183,000 as a couple then you are ineligible to contribute any further to an IRA at all.
Remember, however, that you can only invest your IRA funds in what the IRS deems as “earned income”. This could include wages, salaries, tips, bonuses and commissions as well as earnings from self-employment as well as union strike benefits and long-term disability payments.
You can invest with a traditional IRA
Mutual and exchange-traded funds offer several investment options for an IRA, such as mutual funds. Many of these investments are managed by professional money managers and include assets across a range of asset classes; some can even track stock indexes passively.
Even if you are receiving SSDI benefits, traditional IRA contributions can still be made if income limits are not exceeded. Unfortunately, you may not be eligible to deduct contributions made if either yourself or your spouse have workplace retirement plans over a specific threshold limit.
An alternative way of investing disability benefits is a taxable brokerage account, although this won’t provide the tax advantages or penalty-free withdrawals of an IRA and could impact eligibility for government benefits.
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