USA Funding an IRA WITH A DISABILITY PENISON

[mitch197]

Can a taxpayer contribute to an IRA with income from a disability pension. The disability pension is fully taxable and reported on line 1 of the 1040 . The taxpayer's pension fund reports the income with a 1099R . When the tax payer reaches minimum retirement age , the disability pension will end and be replaced with the regular pension. Is this considered earned income and can the taxpayer use this disability pension to contribute to a traditional IRA

 

[Dave In Capital]

Of course pensions and annuities are excluded from earned income. Whether a disability pension would fall under different rules I don't know. But I'd say it's doubtful when considering that SSDI is not eligible while still being taxed if the taxpayer's total income is above a certain threshold.

This changes if you have earned income from other sources. In which case IRA contributions can be made on the basis of that income.

https://www.irs.gov/publications/p590a

 

[mitch197]

Of course pensions and annuities are excluded from earned income. Whether a disability pension would fall under different rules I don't know. But I'd say it's doubtful when considering that SSDI is not eligible while still being taxed if the taxpayer's total income is above a certain threshold.

This changes if you have earned income from other sources. In which case IRA contributions can be made on the basis of that income.

https://www.irs.gov/publications/p590a

Not so sure . The IRS allows early disability retirement to count as income to qualify for EITC.

IRS states :
"If you get disability retirement benefits before you reach the minimum retirement age, you must claim the benefits as earned income when you claim the EITC.

To find your minimum retirement age, check your retirement plan. The minimum retirement age is the earliest age you could get disability retirement benefits if you didn’t have the disability.

After you reach the minimum retirement age, your disability retirement payments do not quality as earned income"

 

[Dave In Capital]

That must be what they're referring to when they say:

• Certain disability benefits you got before you were the minimum retirement age

In their list of what qualifies as earned income.

Earned Income and Earned Income Tax Credit (EITC) Tables | Internal Revenue Service (irs.gov)

 

[mitch197]

That must be what they're referring to when they say:

In their list of what qualifies as earned income.

Earned Income and Earned Income Tax Credit (EITC) Tables | Internal Revenue Service (irs.gov)

Still confusing to me . The IRS incudes as earned income ,"[c]ertain disability benefits you got before you were the minimum retirement age", but does not count pensions as earned income . Are there other early disability retirements other than a pension ? Maybe the distinction is the " before minimum retirement age " ,and any pension before the minimum age is counted as earned income .

 

[William Smit]

Pensions and annuities, of course, are not used with taxable wages. I'm not sure whether a disability pension will be subject to different laws. However, given that SSDI is ineligible but only be charged if the taxpayer's gross income crosses a certain amount, I'd guess it's impossible.