Distributions from an IRA are generally subject to tax, with certain exceptions granted by the IRS – for instance if they’re used as beneficiary payments and used to purchase, build, or renovate your first home.
IRS rules allow individuals who can demonstrate they are permanently and totally disabled from engaging in any substantial gainful activity to avoid incurring the 10% early withdrawal penalty, among other exemptions.
IRAs and Social Security Disability Insurance
When someone with a disability is declared permanently and totally disabled by a physician, the IRS waives its 10-percent penalty on distributions from an IRA. It’s important to note that this definition differs from most long-term disability (LTD) insurance providers’ definition.
Social Security Disability Insurance does not apply means-tests; your disability checks can be invested directly into an IRA without worrying about non-work income being considered by SSDI. However, if you work while also receiving SSDI benefits under substantial gainful activity (SGA), any earnings could prompt a review to see if you still qualify.
Every time you make a withdrawal from an IRA, your custodian will issue you a 1099-R to report the transaction and report any tax obligations to the IRS. When looking at box 7, they’ll see whether you were considered permanently and totally disabled and whether a 10% penalty waiver applies; so it is crucial if applying for SSDI or already receiving benefits that they consult a certified public accountant or enrolled agent about their income and investments.
IRAs and Supplemental Security Income
Roth individual retirement accounts allow individuals who receive Social Security disability payments to invest in themselves; however, you must have earned income in order to do so.
While opening and taking distributions from an IRA while receiving SSDI benefits is possible, withdrawals could potentially affect eligibility for that program due to being needs-based; one requirement of qualifying for SSDI includes not generating income over a certain threshold amount.
Owning and taking distributions from an IRA won’t affect your eligibility for SSDI if you meet the criteria of being unable to engage in substantial gainful activity, however if you receive Supplemental Security Income (SSI), designed for people with few or no resources, SSA may consider your ownership of an IRA as a financial resource that needs to be spent down before more SSI benefits will be awarded.
IRAs and Long-Term Disability Insurance
Withdrawals from an IRA may affect how much disability benefits you receive from government programs, particularly Supplemental Security Income – which is intended to assist low-income individuals with disabilities.
IRS rules allow recipients of Supplemental Security Income (SSI) to make Roth IRA contributions provided their earned income falls within limits set forth by Social Security Administration; however, tax laws prohibit disabled SSI recipients from withdrawing funds without incurring penalties from their Roth IRAs.
Depending on your policy, long-term disability insurance may provide an exemption to the 10% early withdrawal penalty and could help you avoid having to use retirement savings as you recover. This only applies if your doctor certifies you are totally and permanently disabled.
Disability insurance that pays you in installments to cover both medical and living expenses may help you avoid costly hardship withdrawals from your IRA, though only if the monthly payout substantially matches up with what was contributed and rollover into it.
IRAs and Medicare
Medicaid eligibility rules vary between states, but in general they will consider an applicant’s IRA or 401(k) assets when making their determination. Retirement accounts often remain exempt from asset limits when operating under payout status; that means paying out their Required Minimum Distribution monthly distributions as required.
However, to qualify for this exemption, disabled people must present evidence from a physician that their physical or mental impairment is expected to be permanent and of indefinite duration. They should include this report with their annual tax returns to satisfy the IRS.
Some states such as California, Georgia and New York allow a person to protect their IRA and 401(k) assets from Medicaid by transferring them into an irrevocable trust set up specifically for this purpose. While this solves the asset problem, income generated from these accounts must still follow state-specific spend-down rules in order to be spent down.
