Taxation of Social Security Disability Payments and an IRA Distribution

by Maggie McCormick

You expect to pay taxes on your income, but when it comes to Social Security disability payments and IRA distributions, the rules become a bit more complicated. Though not everyone who receives disability payments has to pay taxes, the Social Security Administration reports that one-third of recipients do. Determine whether you'll have to pay to avoid any tax-time surprises.

Your Total Income

For tax purposes, your total income includes all the compensation that you received for the year. This might include a regular salary that you earned before becoming disabled, disability payments, IRA withdrawals, interest and other capital gains. If you are married and filing a joint tax return, your total income includes your spouse's compensation.

Taxes on Disability Payments

If your total income is less than $25,000 as a single person or $32,000 if you are married filing jointly, you will not have to pay taxes on the disability payments. If it is over this amount, you will pay taxes based on your current income level.

Taxes on IRA Distributions

Withdrawals from a Roth IRA are tax-free, though you'll have to pay taxes on any earnings if your account is less than 5 years old. You will pay taxes on a traditional IRA withdrawal at your current tax rate.

Potential Penalties

Withdrawing from an IRA can incur penalties if you are younger than 59 1/2. You will not have to pay the penalty if your disability is permanent, but you will if it's only a temporary disability and you expect to return to work. With a traditional IRA, the penalty is on the full amount that you withdraw. If you have a Roth IRA, you are allowed to withdraw any contributions that you've made penalty-free, but will pay the penalty on the earnings.