USA Funding an IRA with disability income .

[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

 

[BIG E]

The W-2 reporting is if a person is still working and collecting disability while working.
However - if the income is reported on a 1099-R, then the income gets reported on the IRA line, not the salary line.

 

[mitch197]

The W-2 reporting is if a person is still working and collecting disability while working.
However - if the income is reported on a 1099-R, then the income gets reported on the IRA line, not the salary line.

Respectfully , I disagree . The pension in question is 100% employer funded . It is not an IRA in any respect at all . I would appreciate if you could cite an authority ( IRS or tax court ) stating that it get reported on the IRA line . Further , the IRS allows tax payers on early disability retirement to use the income to qualify for the earned income tax credit . Quoting the IRS, " 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. " Further , the IRS states ,"[a]fter you reach the minimum retirement age, your disability retirement payments do not quality as earned income". As the IRS allows the income to be used for the EITC, it is this reason I was curious as to contributing to an IRA with early disability retirement. Please show me the authority you are using to make the claim that employer funded disability pensions get reported on the line of 1040 with IRA income . TY

 

[BIG E]

In your original post you hadn't stated whether the recipient had reached retirement age or not.
However in answer to your question whether it counts for IRA contributions - the answer is no.
Look at 2021 CCH's Master Tax Guide - P. 677, Par. 2155 middle of page, last sentence just before the section
called "Tax Refunds" it states "Compensation does not include pensions, annuities, or other forms of deferred compensation"

 

[mitch197]

In your original post you hadn't stated whether the recipient had reached retirement age or not.
However in answer to your question whether it counts for IRA contributions - the answer is no.
Look at 2021 CCH's Master Tax Guide - P. 677, Par. 2155 middle of page, last sentence just before the section
called "Tax Refunds" it states "Compensation does not include pensions, annuities, or other forms of deferred compensation"

Thank you for the research and input .