Individual Retirement Accounts (IRAs) allow you to make tax-free qualified distributions after retirement, with contributions subject to IRS limits on how much can be invested in each IRA.
SSDI recipients may work and earn additional income, provided it does not exceed their substantial gainful activity limit, which in 2022 for blind individuals was set at $1,350 monthly (IRAs do count towards MAGI).
How Can You Contribute to an IRA?
IRAs can be an excellent way to save for retirement while enjoying tax benefits, but if you are receiving Social Security Disability Income benefits (SSDI), funding one might pose some issues. In general, you are only permitted to contribute earned income into an IRA; SSDI benefits cannot be included as earned income and contributed toward it.
However, if you receive SSDI and also earn other forms of income – for instance through working at Uber or Lyft – some of your disability checks might qualify to be contributed into an IRA account. This is possible because the IRS counts only taxable income when determining eligibility; they don’t count welfare benefits, unemployment compensation payments, worker’s compensation payments or alimony and child support as eligible contributions; however military combat zone compensation might count toward your IRA contribution limits.
Can You Contribute to a Roth IRA?
SSDI beneficiaries may make contributions to a Roth IRA provided they also have other earned income sources; however, SSDI payments could count against income limits that determine eligibility for Roth contributions.
IRAs should only be funded with earned income, such as wages, salaries, tips or any taxable compensation such as unemployment benefits or worker’s comp benefits. However, additional sources of funding such as unemployment compensation or worker’s comp benefits may also be appropriate.
As part of your income tax refund, you may also use it (or at least part of it) to contribute directly to an IRA by filing Form 8888 Allocation of Refund with your income tax return. However, keep in mind that you can only do this once annually and any property must remain within an IRA for at least five years to avoid incurring a 10% penalty fee. As an alternative option, rollover the money into another retirement plan or use it towards specific purchases such as buying your first home or covering unreimbursed medical costs with this money.
Can You Contribute to a Traditional IRA?
Supplemental Security Income requires that all available assets be liquid, precluding you from contributing to a Traditional IRA. However, if you are neither participating in an employer-sponsored retirement plan nor living with someone who does, then there may be opportunities available for contributing.
Contributions to traditional IRAs may be tax deductible if your modified adjusted gross income (MAGI) falls within the contribution limit for that year; this limit applies collectively and individually across all of your IRAs – traditional, Roth and SEP IRAs alike. Nondeductible contributions remain tax-free until distribution from an account.
Once you turn 72 years old, required minimum distributions must begin by April 1 of the year following or else be subject to a 10% penalty. You can use our online IRA calculator to estimate RMDs.
Can You Contribute to a SEP IRA?
An Simplified Employee Pension- Individual Retirement Account Contribution Plan, commonly known as SEP IRA, allows employers to contribute up to 25% of each eligible employee’s compensation. “Compensation” refers to wages earned for work performed over an entire year as well as interest and dividend income. Employers establishing SEP plans must complete IRS Form 5305-SEP or its instructions or use a prototype document provided by a financial institution in order to set up and inform eligible employees about it.
SEPs can be utilized by businesses of any size, although they tend to be most popular with self-employed individuals and small-business owners. Their contribution limits are higher than traditional IRAs or employer sponsored 401(k) plans; as with all retirement accounts, earnings in an SEP IRA are taxed when withdrawn in retirement and distributions made before age 59 1/2 incur a 10 percent penalty tax.
