disability pension
I have been on total disability since July 2, 2006. I receive income from S.S. and two private policies. I recently applied to The International Union of Operating Engineers for a disability pension. They sent me a letter today explaing the monies we will be receiving. Of course we would like to pay zero or the least amount that we can in income taxes. We are married with four children who all live at home. Three are in college. They are 21,19,18. One daughter who is 24.
My question relates to the disability pension income. We will receive a rectroactive payment starting about Jan. 1, 2007. We will get a lump sum amount of about $29,000. Then we will receive a monthly income. When we received a lump sum from S.S. we were able to income average. That is spread it over a couple of years. Do they allow that with a disability rectroactive payment? If not then how do they tax that income? Is it all included as income for the year in which it is received? Can we roll over the lump sum amount received from the disability pension into a qualified plan so it won’t be taxable. Can we roll it into a Roth IRA without tax or penalties? How is the monthly income treated on the 1040? What line does it go on? Please help us. Thank You.
Permalink Submitted by Alan Spross on Wed, 2010-03-31 21:36
There is no lump sum election with the private disability pension as there is with SS disability benefits. The insurors will have to provide you with specific information, but generally speaking, prior to your earliest pension age had you not been disabled and if you paid the premiums for these policies, the benefits should be tax free, but you would get a W-2 with a code of J on it indicating the tax free amount. If the premiums were partially paid by your employer or union and by you, the portion of the pension attributed to the premiums THEY paid would be taxable W-2 income. Taxable amounts would be reported on line 7 of Form 1040. The lump sum would likely receive the same treatment as your beginning pension, so your taxable income may be higher for the year of the lump sum and it could also affect your AGI relative to how much of your SSD must be included in your AGI.
After you reach that earliest retirement age stated above, the pension would change over to a 1099R from the W-2 and those are reported on line 16 of Form 1040 instead of line 7.
These payments are not eligible for rollover to a retirement plan, but if you receive a W-2 that reports taxable income in Box 1, you will have earned income from which to make a regular IRA contribution for that year. Of course, that stops once the 1099R replaces the W-2.
The key to determining the taxable amount of the pension rests with who paid the premiums, and you will have to get those specifics from the insurance company or plan adminstrator. Those specifics could vary with the general description above, so whatever information they do not provide automatically, ask them so you can plan appropriately. There might also be some education credits you are eligible for as a result of the college expenses.