If you become disabled, you might need to tap your individual retirement account even if you receive disability benefits. Money you take out of a traditional IRA counts as taxable income. However, the effect of income on your disability benefits depends on which program is helping you.
Social Security Disability Insurance
Social Security Disability Insurance, or SSDI, is available to taxpayers who have accumulated sufficient work credits. The required number of credits depends on your age. You can earn up to four credits a year, one for each $1,160 of earned income. IRA withdrawals don’t earn work credits. You can continue to earn income while receiving SSDI, but limits apply. During the first nine months, you can earn any amount. After nine months, you enter a three-year period in which your earnings can’t exceed $1,040 per month. If you’re blind, the limit is $1,740. Withdrawals from an IRA are not earned income and don’t count against you when figuring your SSDI benefit.
Supplemental Security Income
If you’re disabled but don’t have enough work credits, you still might qualify for Supplemental Security Income, or SSI. This program pays out less per month than does SSDI. You can earn up to $85 a month without decreasing your SSI benefit. The Social Security Administration, or SSA, deducts 50 cents for each dollar of monthly earnings above $85. SSI pays benefits based on financial need, so money you take out of an IRA might reduce your payments. Also, the SSA generally requires you to spend down your assets -- excluding non-countable assets such as your home, a burial plot, a car and furnishings. You spend down you assets by paying your bills or buying non-countable assets. Assets are "non-countable" if the SSA doesn't count them when assessing your resources. Lending or temporarily transferring money to someone else is not an acceptable way to spend down. However, you can spend down by transferring money to your disabled child.
As of 2013, you can receive up to $710 a month in SSI benefits. You must spend down all but $2,000 of your resources to receive SSI. This includes the balance in your IRA. However, if you turn your IRA into an annuity, the SSA won’t include it in the $2,000 limit, because you've replaced the cash value with a stream of annuity payments. You can earn income of $65 a month and receive unearned income of $20 a month without losing any SSI benefits. IRA distributions, including IRA annuity payments, are unearned.
Buying an IRA Annuity
To take your IRA off the SSA’s radar, use it to buy a qualified annuity contract. This is a tax-free transaction. You need to buy an immediate annuity so that your IRA no longer has a cash balance. The SSA values a retirement fund at the amount you can currently withdraw. An immediate annuity removes this amount. Your annuity makes payments based on your life expectancy. If you are married to a younger spouse, you can use your joint life expectancies to reduce the size of your monthly payments. The monthly income you receive is taxable. However, if you are receiving SSI, your tax rate might be zero or close to it. Annuities do not trigger the 10 percent penalty on IRA withdrawals before age 59 1/2.
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