Calculate the Benefits of Concurrent Roth IRA and Disability Pay

  • A Roth IRA is an individual retirement account that allows investors to defer taxes on their earnings, making their accounts more attractive to early retirees and high-income earners.
  • Roth IRAs require a minimum annual contribution of $5,500 or $6,500 for those aged 50 and over.
  • Roth IRAs are attractive because they are funded with after-tax dollars and, therefore, the accounts grow tax-free.

A Roth IRA is an individual retirement account that allows investors to defer taxes on their earnings, making their accounts more attractive to early retirees and high-income earners. Roth IRAs require a minimum annual contribution of $5,500 or $6,500 for those aged 50 and over.
In addition, a Roth IRA owner cannot be younger than 18 or older than 70 1/2, and he or she must have earned income.

Eligible Disability Pay

To be eligible for concurrent benefits, your base pay must be at least $1,200. Your disability pay, including retroactive pay, may not be more than 100 percent of your base pay.

In order to receive disability benefits in addition to your Roth IRA contributions, you must repay the Roth contributions once you return to work.

Roth IRA Contributions
You can contribute up to $6,000 to a Roth IRA in 2021. Depending on your income, you may be eligible to contribute up to $6,000, $7,000, or $8,000 in 2021.

You can contribute the $6,000 to your IRA in 2021, even if you receive disability pay.

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If you work for a company that offers a nonqualified deferred compensation plan, you can contribute up to $19,500 to your Roth IRA in 2021.

Disability Benefits
You can receive up to 60 percent of your base pay for a total disability. If you receive less than 60 percent of your base pay, you are partially disabled.

To be eligible for disability benefits, you must have a Social Security disability or Social Security disability and workers compensation disability.

The disability benefit amount is based on your average indexed monthly earnings or AIME for short.

You can receive disability benefits for no more than 12 years.

You can receive disability benefits and Roth IRA contributions for up to 5 years.



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Roth IRA Contributions

When disability pay is taken into account, the Roth IRA contribution limits in 2020 are $6,000 for those under 50 years old and $7,000 for those 50 and over. However, the disability exclusion allows you to contribute as much as $11,000 to a Roth IRA if you are disabled.
Withdrawals of Roth Contributions
Unlike your traditional IRA, there are no mandatory minimum distributions (RMD) required from a Roth IRA once you reach age 70 1/2. This means that once you attain the age of 70 1/2, you can withdraw your accumulated contributions without penalty.
Disability Withdrawals
With traditional IRAs, you must begin taking withdrawals once you reach age 70 1/2. When disability payments are factored in, this age is extended as long as you are receiving disability payments.

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Roth IRA Withdrawals

You can withdraw Roth IRA contributions at any time without penalty. If you make a withdrawal prior to age 59 1/2, you will pay a 10 percent early withdrawal penalty. Roth IRA distributions after age 59 1/2 are tax-free and penalty-free.
Disability Pay
Disability pay is considered taxable income. Assuming you withdraw the entire amount in one year, your income will jump from $25,000 to $50,000.

Roth IRA Taxable Income

Roth IRA taxable income is the total of your taxable wages, plus 50% of your self-employment income, plus 50% of your net investment income.
Disability Pay
Disability pay is periodically paid to you, usually in accordance with the terms of your employment agreement or Social Security regulations. The amount you receive is based on your federal tax rate.

In this example, your disability pay ($1,000) and your Roth IRA taxable income ($2,000) are added together. The resulting sum ($3,000) is your combined Roth IRA taxable income.



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Roth IRA Conversions

If Rex converts $100,000 of pre-tax salary into a Roth IRA, Rex will be taxed on the $100,000 at Rex's current tax rate of 30%. This additional tax will amount to $30,000.
Disability Pay
In return for Rex's disability, Rex's employer pays Rex $2,000 per month. This $2,000, Rex can withdraw from the Roth IRA tax-free. The IRS allows employees receiving the disability payments to withdraw up to $39,600 per year without penalties. Rex will need to make withdrawals from the Roth IRA until Rex reaches $39,600.