Social Security Disability Insurance can be vital financial assistance, but for some recipients, it may not be the only source of funds. Some who receive SSDI benefits may also have access to retirement accounts such as a 401(k). These people should be aware that there are financial and tax considerations when making withdrawals from retirement accounts for SSDI recipients.
SSDI
To qualify for SSDI benefits, recipients must have a disability that prevents them from working or engaging in substantial gainful activity. The Social Security Administration pays a set benefit to eligible SSDI recipients.
The SSA also has other requirements besides a person’s disability. Eligibility and payments also depend on employment. Recipients must meet certain workplace participation standards and must have worked for a specified time.
Retirement withdrawals
SSDI payments are terminated under two conditions. First, the recipient returns to work at a level that the SSA classifies as substantial. Or the recipient’s condition improves and the SSA determines that the person no longer has the disability.
Unearned income, money earned outside of labor, does not affect SSDI. Withdrawals from a 401(k) plan or other retirement accounts will not affect benefits.
Taxes
There are tax consequences accompanying 401(k) disbursements. Recipients living solely off of SSDI benefits usually have no tax liability because their income likely falls below $25,000. If the account withdrawals or any unearned income places the recipient above that limit, income taxes are imposed.
Taxpayers with a qualifying disability may also make tax-free withdrawals from a 401(k) plan even before they are 59-and-a-half years old. But the IRS uses a different definition of a qualifying disability as the SSA which defines that disability as a medical condition that prevents a person from working.
However, the IRS allows withdrawals from a 401(k) if the disability is total and permanent.
After a recipient turns 65, their SSDI benefits cease, and these are automatically converted to retirement benefits.
SSDI taxes
SSDI benefits alone do not impact taxes. But these benefits are taxable at a comparatively low threshold if there is other income.
Taxes on SSDI benefits are calculated on a base amount. The base amount is set by adding one-half of Social Security benefits and 100 percent of all other income.
In 2023, the base amount triggering taxes is $25,000 for recipients who are single, head of a household, qualifying spouse, or married filing separately and living apart from their spouse for the entire year. The base is $32,000 for recipients married filing jointly with their spouse. The limit is $0 for recipients married filing separately and having lived with their spouse at any time during the tax year.
Also, retirement income from a government pension can affect Social Security payments. There is a government pension offset for recipients who received a pension from government employment but did not pay Social Security taxes while they were employed. Their spouse, widow, widower benefits will be reduced by two-thirds.