If retirement is looming on the horizon, or if you are applying for Social Security disability or Supplemental Security Income, it's wise to keep posted on Social Security's rules for income and assets. The agency makes an important distinction between earned and unearned income, which will affect your eligibility for some kinds of benefits.
The Social Security Administration does not include your 401(k) savings as earned income; it's considered unearned income.
Social Security Retirement Benefits Eligibility
Your eligibility for Social Security retirement benefits is based on your work record, and your benefit level depends largely on how much you've earned over your working life. Social Security does not count 401(k) savings as earned income, even though you worked for it. Instead, the agency applies a complex formula to your lifetime wage record in order to come up with the monthly benefit, which will be reduced if you begin collecting before your full retirement age (which ranges from 65 to 67, depending on the year of your birth).
The amount of money you've managed to save in a 401(k) does not affect the retirement benefit, nor does any withdrawal you take from the account decrease the amount Social Security pays you. Social Security only adjusts the retirement benefit with a cost-of-living increase, which is set every year according to federal law and guidelines.
Social Security Disability Benefits
If you're applying for Social Security disability, you must prove to the agency that you have a medical condition that has lasted, or is expected to last, at least 12 months, or that will result in your death. This medical condition must prevent you from working and earning enough to support yourself. Although Social Security limits the amount of wage income you can earn when applying for disability, non-wage income does not figure into eligibility.
You can take as much as needed out of a retirement or savings account such as a 401(k), but if you are younger than 59 and a half, the IRS will assess a penalty for any early withdrawal. Otherwise, your earnings from work is limited to the substantial gainful activity amount, which at the time of publication, stood at $1,220 a month before taxes for non-blind individuals and $2,040 for blind individuals.
Supplemental Security Income
If you don't have a sufficient work record for Social Security disability, you can still apply for Supplemental Security Income. The SSI program, however, limits both income and assets, known in Social Security parlance as "resources." Before Social Security will review your medical records to determine disability, it will carefully review bank statements as well as any statements from a 401(k). If you have resources of more than $2,000 (if you are single) or $3,000 (if you are married), then you won't qualify for SSI.
SSI Income Limits
Social Security limits both earned and unearned income for SSI applicants as well. The basic limit for earned income is $1,627 monthly for single persons ($791 for unearned income), and earned income of $2,399 a month for couples ($1,177 for unearned income).
Income from a 401(k) plan is considered unearned income, similar to other Social Security benefits, unemployment benefits, interest income and cash gifts from a friend or someone in your family.
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