Roth IRA - Long Term Disability and SSD only income

[alykatt97]

If I am permanently disabled, 58 yrs. old, not working, and my only income is SSD (social security disability at $2,686/mo) and income benefits from group long term disability insurance sponsored by my past employer (at $2700/mo. and taxable), then can I still contribute to my Roth IRA? Also, would my SSD be taxable? I appreciate any help I can get to answer these two questions.

[gloriah5200]

You will need to know the minimum retirement age at your most recent job to determine if your long term disability will be considered earned income or not.

It helps to think of earned income as money you work for, as opposed to passive income like interest, dividends, or rental income if you're not in the business of renting out properties.

The IRS defines earned income as:

• Taxable income you earned as an employee, such as wages, salaries, commissions, and tips
• Profits from operating your business or farm
• Long-term disability pay, if received before the minimum retirement age
• Union strike benefits

The IRS also gives you the option of treating nontaxable combat pay (code Q in box 12 of your W-2) as earned income for the Earned Income Credit (EIC).

Worker's comp, unemployment, and pensions don't count as earned income.

IRS definition of earned income

Taxability of social security compensation is determined by your filing status and the other income and total income earned along with it on your return.  

For 2021, 2020 and 2019, the total contributions you make each year to all of your traditional IRAs  and Roth IRAs can't be more than:

• $6,000 ($7,000 if you're age 50 or older), or
• If less, your taxable compensation for the year

For additional information regarding the Roth IRA contribution, please refer to the following:

Contribution limits for Roth IRAs

[Edited 03/31/2021|12:04 pm PST]

[alykatt97]

The minimum retirement age at my most recent job was 62. Since I started receiving my Long Term Disability benefits at 57 does that mean the LTD income makes me eligible to continue contributing to my Roth IRA?

Regarding the taxability of social security compensation - my filing status is Married filing joint and my total income is SSD $2686/mo and $2720/mo LTD benefits. There is no other income - including from my spouse.

Please let me know if I am eligible to contribute to Roth IRA, and if my SSD is taxable.

Thank you in advance.

[MarilynG1]

If your employer LTD is reported on a W-2, it  may be considered taxable Earned Income (replaces wages) and you could make Roth IRA Contributions.  

Click this link for more info on Is My Disability Income Taxable?

Generally, if you're not earning any income, you can't contribute to either a traditional or a Roth IRA, unless your spouse had earned income.  You need to determine first if your LTD is reported as Earned Income. 

Your Social Security benefits reported on a Form 1099-SSA may be taxable, to the extent of your other income. If your LTD is considered taxable income, part of your SS income is taxable.  If not, your SS benefits will not be taxable. 

TurboTax will calculate this for you and show the taxable amount on Form 1040, Line 6b. 

Click this link for more info on Taxable Social Security Benefits. 

Click this link for more info on How to Enter Social Security Benefits (SSA-1099). 

[alykatt97]

My LTD is reported on a W-2 coming straight from my employers group LTD policy provider - Hartford. The amount of disability income is listed under Wages, Tips, Other compensation with Box 13 checked as "Third Party Sick Pay". Taxes are withheld. I will receive this until I'm 67 years old. Can I make Roth IRA Contributions based on this information?

Thank you in advance for your help.

[MarilynG1]

Yes!

[alykatt97]

Even though it comes in as Third Party Sick Pay? Can you explain the rule to me? Thank you!

[MarilynG1]

Because it is reported on a W-2 and you are under Retirement Age, it is considered as 'wage replacement' as mentioned earlier.