Can I Invest Social Security Disability Payments in a Roth IRA?

Jennifer E. Engen

Opening a Roth IRA can yield some tax benefits, including the ability to take tax-free qualified distributions. Compensation, also called “earned income,” is a requirement for making Roth IRA contributions. If you’re receiving Social Security disability payments, it’s important to understand when you can—and potentially can’t—make Roth IRA contributions.

Key Takeaways

  • A Roth IRA offers tax-free qualified distributions in retirement for eligible savers.
  • Social Security Disability Insurance (SSDI) benefits are not considered to be earned income.
  • You may be able to invest in a Roth IRA while receiving Social Security disability payments if you have other earned income.
  • Disability retirement benefits received before reaching the minimum retirement age may count as earned income under IRS rules.

Roth IRA: Who Can Contribute?

Anyone who has earned income and meets Internal Revenue Service (IRS) income guidelines can make contributions to a Roth IRA. Earned income includes:

  • Wages, salaries, tips, professional fees, bonuses, and other amounts received for providing professional services
  • Commissions
  • Self-employment income
  • Alimony and separate maintenance
  • Nontaxable combat pay
  • Scholarships or fellowships associated with graduate or postdoctoral study

Rental income, interest income, dividend income, pension and annuity income, deferred compensation payments, and amounts excluded from income don’t count as earned income for IRS purposes.

How much you can contribute to a Roth IRA will depend on your income and filing status. For 2022 the maximum contribution to a Roth IRA is $6,000 ($7,000 for savers age 50 and older).

Roth IRA Contributions for 2022
If your filing status is… And your modified AGI is… Then you can contribute…
Married filing jointly or qualifying widow(er) Less than $204,000 Up to the limit
Married filing jointly or qualifying widow(er) From $204,000 to $214,000 A reduced amount
Married filing jointly or qualifying widow(er) Greater than $214,000 Zero
Married filing separately and you lived with your spouse at any time during the year Less than $10,000 A reduced amount
Married filing separately and you lived with your spouse at any time during the year   $10,000 or greater Zero
Single, head of household, or married filing separately and you did not live with your spouse at any time during the year Less than $129,000 Up to the limit
Single, head of household, or married filing separately and you did not live with your spouse at any time during the year From $129,000 to $144,000 A reduced amount
Single, head of household, or married filing separately and you did not live with your spouse at any time during the year Greater than $144,000 Zero

Source: IRS

Contributions made to a workplace retirement plan do not affect the amount you can contribute to a Roth IRA.

Social Security Disability Payments and Roth IRAs

Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI) are two federal programs that provide financial assistance to eligible people with disabilities. The former pays benefits to people with disabilities who are insured, meaning they’ve worked and paid into Social Security. The latter pays benefits to adults and children with disabilities who have limited income and financial resources.

Would either one count as income for the purposes of contributing to a Roth IRA? Under IRS rules disability payments received from Social Security do not constitute earned income. Military disability pensions are also excluded as earned income. There is an exception for disability retirement benefits received prior to reaching full retirement age.

This means that if Social Security disability payments are your only source of income, you would not be able to use that income to qualify for a Roth IRA. If, however, you have other earned income aside from them, then you may be able to contribute to a Roth, assuming you’re within the IRS income guidelines. The IRS won’t specifically ask whether you used earned income or Social Security disability payments to invest in a Roth IRA.

There is, however, a catch-22 to be aware of when receiving Social Security disability benefits.

Married couples can open and make contributions to a spousal IRA, which though in the name of the spouse without taxable earned income is funded by the spouse who has earned income.

Social Security Disability Earning Limits

SSDI benefits are designed to help people who are unable to work because of a disability. If the Social Security Administration (SSA) determines that you no longer meet the definition of disabled, then your benefits may cease. You can also be excluded from qualifying for benefits if you have earned income that’s related to substantial gainful activity (SGA).

For 2022 your earnings from work cannot average more than $1,350 per month if you’re receiving disability benefits. This amount increases to $2,260 if you’re legally blind. Once income exceeds these levels, the SSA no longer considers you to have a qualifying disability.

What this means is that if you want to invest your Social Security disability payments, you can technically work to meet the earned income requirement for a Roth IRA. However, you have to closely monitor your earnings to avoid going over the allowed thresholds or risk losing your disability benefits.

SSA income guidelines to determine eligibility for SSI payments differ from those for SSDI benefits.

You could, however, open a taxable brokerage account without having to be concerned about income guidelines. You would lose the advantage of tax-free qualified withdrawals, but this could be a workaround if you’re hoping to invest your SSDI payments. Unlike SSI payments, you’re not limited as to how much you can have in financial resources and still receive disability benefits.

There are also no limits on how much you can invest each year, as there would be with a Roth IRA. Capital gains are taxable when selling investments in your brokerage account at a profit. You can take advantage of the lower long-term capital gains tax rate by holding assets for at least one year before selling them. A brokerage account may also offer a broader range of investment options, including stocks, bonds, mutual funds, cryptocurrency, and initial public offerings (IPOs).

Can You Invest Social Security Disability Money?

SSDI benefits are not affected by the amount you have in financial resources, so you could invest them to build wealth for retirement.

Does SSI Count as Income for a Roth IRA?

SSI and SSDI benefits do not count as income for a Roth IRA. The IRS requires savers to have earned income in order to contribute to a Roth account.

Is It Illegal to Trade Stocks While on SSDI?

As the SSA doesn’t place any restrictions on financial resources when receiving SSDI payments, you may trade stocks and other securities legally if you’re receiving those benefits.

Can I Withdraw Money From My IRA if I’m Disabled?

If you become totally and permanently disabled, you can withdraw money from an IRA without triggering a tax penalty. This rule applies to both Roth and traditional IRAs, as well as 401(k) accounts.

The Bottom Line

There is no set rule that prevents you from investing Social Security disability payments if you’re receiving SSDI. There are, however, restrictions on when you can invest that money in a Roth IRA. If you don’t meet the earned income requirement for an IRA, you may need to consider other ways to invest, such as a taxable brokerage account or an annuity.

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