Disabled - considering Traditional IRA to Roth IRA conversion

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FusilliJerry
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Joined: Thu Jun 08, 2017 1:27 pm

Disabled - considering Traditional IRA to Roth IRA conversion

Post by FusilliJerry »

I’m currently disabled due to a medical procedure that went badly in 2018. My body is slowly healing, so I don’t think I will be disabled forever. But I think it will take a few more years perhaps before I can return to employment.

My financial advisor floated the idea of converting one of our traditional IRAs to a Roth IRA while my income is down. Technically, we are thinking of converting a traditional IRA that is in my wife’s name.

Since he is not a tax guy nor SSDI expert, he cautioned me to seek advice on whether doing this conversion could in any way jeopardize my SSDI benefits.

I think this conversion qualifies as earned income, am I correct? If so, considering it’s my wife’s IRA, I don’t see how it would be used against me to say I am not disabled.

Now - next year - we may want to convert a traditional IRA in my name. So I’m still interested in understanding how this “earned income” plays against SSDI rules.

Thoughts??

Thank you!
Silk McCue
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Joined: Thu Feb 25, 2016 7:11 pm

Re: Disabled - considering Traditional IRA to Roth IRA conversion

Post by Silk McCue »

It isn’t earned income.

Take a look at this reference.

https://www.investopedia.com/investment ... es-5097365

Extracted quote.
Investments that Don’t Jeopardize SSD Benefits

Someone who receives SSD benefits can invest in securities such as stocks, bonds, exchange-traded funds (ETFs), and real estate investment trusts (REITs) without jeopardizing their benefits. Dividend income from stocks, as well as other sources of passive income, is OK as far as the SSA is concerned because it’s unearned income. “The key is whether the investment income is earned or not. Passive income is not earned in the legal meaning of SS law and not counted as evidence of an ability to work,” says Gantt.
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MiddleOfTheRoad
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Re: Disabled - considering Traditional IRA to Roth IRA conversion

Post by MiddleOfTheRoad »

It is not earned income. It is taxable income.
niagara_guy
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Re: Disabled - considering Traditional IRA to Roth IRA conversion

Post by niagara_guy »

I will model my 2021 tax return using 2020 tax software before I make a decision on how much to convert to Roth (it's not exact but it's close). How much your SSDI is taxed is based on your total income (including Roth conversions). Don't forget to model your state tax return as well. I believe there are some spreadsheets out there that will help but I haven't used them.
Topic Author
FusilliJerry
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Joined: Thu Jun 08, 2017 1:27 pm

Re: Disabled - considering Traditional IRA to Roth IRA conversion

Post by FusilliJerry »

MiddleOfTheRoad wrote: Fri Sep 10, 2021 2:13 pm It is not earned income. It is taxable income.
I guess what tripped me up, was this train of thought:

It would have been earned income and taxable income back when I was working. But instead, I chose to put it aside into a Traditional IRA.

Now that I’m pulling it out of the Traditional and converting to Roth, I figured it’d be handled as it would have back then, had it gone straight to a Roth. I would have paid taxes on the money. And it would have been considered earned income. Yes? No?

Thanks!
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grabiner
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Re: Disabled - considering Traditional IRA to Roth IRA conversion

Post by grabiner »

FusilliJerry wrote: Tue Sep 14, 2021 7:04 pm
MiddleOfTheRoad wrote: Fri Sep 10, 2021 2:13 pm It is not earned income. It is taxable income.
I guess what tripped me up, was this train of thought:

It would have been earned income and taxable income back when I was working. But instead, I chose to put it aside into a Traditional IRA.

Now that I’m pulling it out of the Traditional and converting to Roth, I figured it’d be handled as it would have back then, had it gone straight to a Roth. I would have paid taxes on the money. And it would have been considered earned income. Yes? No?
It was earned income in the year you earned it. If you claimed the Earned Income Credit when you were working, you used your full salary for computing the amount of earned income, not subtracting the IRA deduction.
Wiki David Grabiner
tj
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Re: Disabled - considering Traditional IRA to Roth IRA conversion

Post by tj »

FusilliJerry wrote: Tue Sep 14, 2021 7:04 pm
MiddleOfTheRoad wrote: Fri Sep 10, 2021 2:13 pm It is not earned income. It is taxable income.
I guess what tripped me up, was this train of thought:

It would have been earned income and taxable income back when I was working. But instead, I chose to put it aside into a Traditional IRA.

Now that I’m pulling it out of the Traditional and converting to Roth, I figured it’d be handled as it would have back then, had it gone straight to a Roth. I would have paid taxes on the money. And it would have been considered earned income. Yes? No?

Thanks!

Earned Income is the income that you pay OASDI tax on. Contributing to an IRA does not reduced earned income nor dodge the OASDI taxes.

Converting an IRA is a taxable distribution of retirement income. Totally different thing.
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