Can I Invest Social Security Disability Payments in a Roth IRA?

Opening a Roth individual retirement account (Roth IRA) can yield some tax benefits, including the ability to take tax-free qualified distributions. Earned income, is a requirement for making Roth IRA contributions. If you’re receiving Social Security disability payments, it’s important to understand when you can—and potentially can’t—make Roth IRA contributions.

Roth IRA: Who Can Contribute?

Anyone who has earned income and meets Internal Revenue Service (IRS) income guidelines can make contributions to a Roth IRA. Earned income includes:

• Wages, salaries, tips, professional fees, bonuses, and other amounts received for providing professional services
• Commissions
• Self-employment income
• Alimony and separate maintenance
• Nontaxable combat pay
• Scholarships or fellowships associated with graduate or postdoctoral study

Rental income, interest income, dividend income, pension, annuity income, deferred compensation payments, and amounts excluded from income don’t count as earned income for IRS purposes.

How much you can contribute to a Roth IRA will depend on your income and filing status. For 2022, the maximum contribution to a Roth IRA is $6,000 ($7,000 for savers age 50 or older). For 2023, the maximum contribution rises to $6,500 ($7,500 for those aged 50 and over).

Source: Internal Revenue Service

Social Security Disability Payments and Roth IRAs

Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI) are two federal programs that provide financial assistance to eligible people with disabilities. The former pays benefits to people with disabilities who are insured, meaning that they’ve worked and paid into Social Security. The latter pays benefits to adults and children with disabilities who have limited income and financial resources.

Would either one count as income to contribute to a Roth IRA? Under IRS rules, disability payments received from Social Security do not constitute earned income. This means that if Social Security disability payments are your only source of income, you would not be able to use that income to qualify for a Roth IRA.

However, if you have other earned income aside from them, then you may be able to contribute to a Roth, assuming that you’re within the IRS income guidelines. The IRS won’t specifically ask whether you used earned income or Social Security disability payments to invest in a Roth IRA.

Aside from Social Security disability payments, other income received from military disability pensions is also excluded as earned income and there is an exception for other forms of disability benefits received before reaching full retirement age.

Social Security Disability Earning Limits

SSDI benefits are designed to help people who are unable to work because of a disability. If the Social Security Administration (SSA) determines that you no longer meet the definition of disabled, then your benefits may cease. You also can be excluded from qualifying for benefits if you have earned income that’s related to the substantial gainful activity (SGA).

For 2022, your earnings from work cannot average more than $1,350 per month if you receive disability benefits. This amount increases to $2,260 if you’re legally blind. For 2023, these limits increase to $1,470 and $2,460, respectively. Once income exceeds these levels, the SSA no longer considers you to have a qualifying disability.

What this means is that if you want to invest your Social Security disability payments, you can technically work to meet the earned income requirement for a Roth IRA; however, you have to closely monitor your earnings to avoid going over the allowed thresholds or risk losing your disability benefits.

You could, however, open a taxable brokerage account without having to be concerned about income guidelines. You would lose the advantage of tax-free qualified withdrawals, but this could be a workaround if you hope to invest your SSDI payments. Unlike SSI payments, you’re not limited as to how much you can have in financial resources and still receive disability benefits.

There are also no limits on how much you can invest each year, as there would be with a Roth IRA. Capital gains are taxable when selling investments in your brokerage account at a profit. You can take advantage of the lower long-term capital gains tax rate by holding assets for at least one year before selling them. A brokerage account may also offer a broader range of investment options, including stocks, bonds, mutual funds, cryptocurrency, and initial public offerings (IPOs).

The Bottom Line

No set rule prevents you from investing in Social Security disability payments if you’re receiving SSDI. There are, however, restrictions on when you can invest that money in a Roth IRA. If you don’t meet the earned income requirement for an IRA, you may need to consider other ways to invest, such as a taxable brokerage account or an annuity.

Correction-Oct. 10, 2022: This article has been corrected from a previous version that erroneously included the phrase “disability retirement” to describe social security disability payments. In fact, disability benefits and retirement benefits are distinct benefit programs.