Can I Contribute to an IRA if I Am on Disability?

Saving for retirement is important, but if you’re receiving disability benefits, you may wonder whether you can contribute to an Individual Retirement Account (IRA). The answer depends on your income source, as IRAs require contributions to come from specific types of earnings.

Qualifying Income Criteria

To contribute to an IRA while on disability, you must have “earned income” as defined by the IRS. This includes wages, salaries, commissions, self-employment earnings, and taxable alimony. Disability benefits like Supplemental Security Income (SSI) and most Social Security Disability Insurance (SSDI) payments do not qualify, as they replace lost wages rather than compensate for work performed.

If you work while receiving disability benefits, your wages or self-employment income can be used for IRA contributions. For example, part-time earnings from a W-2 job or net income from freelance work count, provided self-employment taxes are paid.

If you rely solely on disability benefits, contributing to an IRA is not possible. However, if you are married and your spouse has earned income, you may contribute through a spousal IRA, which allows a non-working spouse to fund an IRA based on their partner’s earnings.

Traditional and Roth IRA Options

Choosing between a Traditional and Roth IRA depends on tax treatment. A Traditional IRA allows pre-tax contributions, reducing taxable income for the year. Withdrawals in retirement are taxed as ordinary income. Early withdrawals before age 59½ generally incur a 10% penalty unless an exception applies, such as permanent disability.

A Roth IRA is funded with after-tax dollars, meaning contributions do not lower taxable income when made. The benefit is that qualified withdrawals, including earnings, are tax-free in retirement. Contributions (but not earnings) can be withdrawn anytime without penalty, offering more flexibility if unexpected expenses arise.

Contribution Limits

The IRS sets annual IRA contribution limits. For 2024, the maximum is $7,000 if you’re under 50, and $8,000 if you’re 50 or older. These limits apply across all IRAs combined.

If your earned income is below the contribution limit, you can only contribute up to what you earned. For example, if you made $4,500 in taxable wages, that is your contribution cap. Exceeding this results in a 6% penalty tax for each year the excess remains in the account.

Roth IRA contributions have income limits. In 2024, single filers with a modified adjusted gross income (MAGI) above $146,000 see reduced contribution limits, with full ineligibility at $161,000. For married couples filing jointly, the phase-out starts at $230,000 and ends at $240,000. Traditional IRAs do not have income limits for contributions, but tax deductibility is affected if you or your spouse have a workplace retirement plan.

Spousal IRA Factor

For individuals on disability without sufficient earned income, a spousal IRA allows a working spouse to contribute on behalf of a non-working or low-income spouse, provided they file jointly. This enables couples to maximize retirement savings even if one partner is not earning a wage.

In 2024, a married couple under 50 could contribute up to $14,000—$7,000 per spouse. If both are 50 or older, the combined limit increases to $16,000, including catch-up contributions. The working spouse must have enough earned income to cover both contributions, but there are no additional requirements for the non-earning spouse beyond joint filing status.

The tax treatment of spousal IRA contributions follows the same rules as individual IRAs. If the working spouse has a workplace retirement plan, deductibility for Traditional IRA contributions phases out at a MAGI of $123,000 to $143,000 in 2024. If the working spouse does not have a workplace plan, contributions are fully deductible regardless of income. Roth IRA eligibility remains subject to standard income phase-outs.

Early Access Rules

Withdrawing IRA funds before retirement age can be costly. Traditional IRA withdrawals before age 59½ generally incur a 10% penalty in addition to ordinary income taxes. However, an exception applies for individuals who qualify as permanently and totally disabled under IRS guidelines.

To qualify, a physician must certify that your condition prevents substantial gainful activity and is expected to last indefinitely or result in death. If you meet this definition, you can withdraw from a Traditional IRA without the 10% penalty, though regular income taxes still apply.

Roth IRAs offer more flexibility. Contributions can be withdrawn at any time without taxes or penalties. However, earnings withdrawn before age 59½ are subject to income tax and the early withdrawal penalty unless an exception applies.

Understanding these rules can help you make informed decisions about saving for retirement while receiving disability benefits.