Do the Disabled Qualify for a Roth IRA?

Qualifications To Contribute

The IRS only wants people who earn less than a certain amount to make Roth IRA contributions. As of 2011, you can make a contribution of up to $5,000 per year as long as your modified adjusted gross income is less than $105,000 for a single taxpayer, or $167,000 for married couples who file taxes jointly. Above those income levels, your ability to contribute is reduced gradually until incomes reach $120,000 and $177,000 respectively. At that point, you cannot contribute to a Roth IRA. You or a spouse must have earned income to make these contributions.

Disabled people may contribute to Roth IRAs, regardless of their disability. They fall under the same rules regarding contributions as anyone else. They must have earned income. Otherwise, a spouse may contribute to a spousal Roth IRA on their behalf. However, disabled individuals may qualify for an exception to the 10 percent penalty on withdrawals before age 59 and a half. However, if the individual is receiving benefits from a disability insurance or compensation plan, that income could potentially count against the individual for purposes of meeting the income test for eligibility to contribute to Roth IRAs.

Generally, you may roll balances in IRAs, 401(k) plans, and similar retirement plans directly into a Roth IRA. You would have to pay income taxes on any amounts you roll over into the Roth from a tax deferred retirement plan, but you would not need to pay the 10 percent penalty on earnings. For tax year 2011, you can spread that income tax bill over 2011 and 2012, however. You do not need to pay the entire income tax bill in the same year. There is no income limit to be eligible for a Roth IRA rollover as of 2011.

The underlying assumption with Roth IRAs is that they make sense for anyone who believes that their income tax rate will be higher in retirement than it is currently. If you do not anticipate being in a higher tax bracket in retirement, then you may be better off contribution to a traditional IRA. Also, if your employer provides a match for your 401(k) plan, it may make sense to contribute at least the amount your employer will match.