If you receive Social Security Disability Insurance (SSDI) payments, you might be wondering if you can supplement them with some money from your retirement accounts, such as a 401(k). While withdrawing from your retirement funds won’t usually impact your disability insurance, increasing your income can have tax implications. Here are the biggest considerations when withdrawing from a 401(k) while on SSDI.
If you want professional help navigating financial issues, consider enlisting the help of a financial advisor.
If you qualify for SSDI, the Social Security Administration will pay you a set amount per month. To qualify for SSDI, you need to have a disability that doesn’t allow you to work or engage in “substantial gainful activity.”
A disability isn’t all you need to qualify for SSDI: The Social Security Administration also determines your SSDI eligibility and payment amounts based on your employment. Like other Social Security programs, you must meet certain standards for workplace participation, including having worked long enough and recently enough to qualify.
While SSDI is a safety net for many disabled workers, the payments aren’t large. The average monthly Social Security benefit payment for disabled workers in January 2023 was $1,483, according to the Social Security Administration’s 2023 COLA Fact Sheet.
How Do Retirement Withdrawals Affect SSDI?
According to the Social Security Administration, there are only two things that would cause your SSDI payments to stop: you are able to go back to work at a level they consider “substantial,” or your condition improves and they determine you no longer have a disability. SSDI is not impacted by unearned income — that is, money that doesn’t come from you working a job — so withdrawals from a 401(k) plan will not affect your benefits.
But there are tax implications that come along with 401(k) disbursements. If you were previously living off of only SSDI, you likely didn’t owe taxes as your income would fall below $25,000. If 401(k) withdrawals or any other form of unearned income put you above the limit, you’ll need to pay income tax.
One note: While there’s usually a 10% penalty for withdrawing from your 401(k) before the age of 59 ½, you can withdraw early if you have a qualifying disability. However, the IRS defines disability differently than the Social Security Administration does. The Social Security Administration defines a disability primarily as a medical condition that prevents you from working. On the other hand, for the IRS to allow you to withdraw from your 401(k) plan early, the disability must be “total and permanent.”
Another interesting note: Once you reach the age of 65, your SSDI benefits will cease and automatically convert to retirement benefits.
How SSDI Taxes Work
While SSDI on its own won’t trigger taxes, there is a relatively low threshold at which your benefits may be taxable. Let’s take a look at how that works.
The IRS determines whether you have to pay taxes on your benefits based on a base amount. The base amount is determined by adding up one half of your Social Security benefits and 100% of all of your other income. In 2023, the base amount at which taxes kick in is $25,000 if you’re single, head of household, qualifying surviving spouse or married filing separately and having lived apart from your spouse for the whole tax year. It’s $32,000 if you’re married filing jointly with your spouse. And if you’re married filing separately but have lived with your spouse at any point during the tax year, the limit is $0.
As an example, let’s say you’re a taxpayer filing your taxes as a single person. You receive an SSDI payment of $1,400 each month and withdraw about $1,400 from your 401(k) plan each month using the IRS’ disability exception. You have no other income outside of these two sources. Half of your annual Social Security benefits would be $8,400. If you add that to the $16,800 you’re withdrawing from your 401(k) for the year, you’re taxable income comes to $25,200—just over the IRS limit—so you’ll need to pay taxes. On the other hand, if you were living solely on your SSDI income, you wouldn’t owe taxes.
There’s another way in which getting retirement income can affect your Social Security payments. If you receive a pension from a government job but did not pay Social Security taxes while you had the job, your Social Security spouse, widow, or widower benefits will be reduced by two-thirds of the amount of your government pension. This offset is known as the government pension offset.
The Bottom Line
Drawing on your retirement savings, such as a 401(k), won’t impact your SSDI payments. However, if your yearly income, of which 401(k) money can be a part, is more than a set threshold, you may owe taxes on part or all of that income.
- For help navigating retirement planning or tax issues, consider working with a financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Social Security benefits depend on your work and income history. Estimate your payments with our Social Security calculator.
Photo credit: ©iStock.com/designer491, ©iStock.com/ljubaphoto, ©iStock.com/shapecharge