Catch up provision?
I had a man come in who is 66 and is drawing disability through his work. It is not social security disability and the State of Alabama is taxing it. He said that he had read that there is a catch up provision where he could add money into his existing IRA before he retires and that his disability would count as an earned income. Would he still be able to contribute even though he is not actually working?
Permalink Submitted by tomd37 on Thu, 2017-05-04 15:05
Am curious as to what form was used to report the disability income. Assuming it was a 1099-R, what was recorded in boxes 1, 2a, 2b, and 7 on that 1099-R. Was there any other income to be reported on the federal or state tax form? Tom D.
Permalink Submitted by Alan - IRA critic on Thu, 2017-05-04 18:09
If the disability income is reported on a W-2 it will count as earned income for IRA contribution purposes. But there is no special catch up provision other than the age 50 additional 1,000 which brings the total IRA contribution limit to 6500. Income reported on lines 15 or 16 of Form 1040 cannot be used for IRA contributions.
Permalink Submitted by tomd37 on Thu, 2017-05-04 18:29
Alan – My thinking was maybe the disability income was reported on a 1099-R with a code 3 (disability) shown in box 7. It is my understanding that, for someone disabled and under the normal retirement age of their company, the return can be coded such that the disability payment is reported on line 7 of the 1040 as income and possibly make the taxpayer eligible for EIC, if so otherwise qualified. But of course this taxpayer appears to be over 65 and that would most likely be beyond the normal retirement age for his company and not make it eligible to be coded to move to line 7 and not of course eligible for EIC. Correct me if I am wrong, but even if the taxpayer was under the normal retirement age I don’t believe such disability income moved to line 7 would be considered as “earned income”. Tom D.
Permalink Submitted by Steve Hagedorn on Thu, 2017-05-04 19:13
Per IRS website:https://www.irs.gov/retirement-plans/403b-plan-fix-it-guide-an-employee-making-a-15-years-of-service-catch-up-contribution-doesnt-have-the-required-15-years-of-full-time-service-with-the-same-employer
Permalink Submitted by Alan - IRA critic on Thu, 2017-05-04 19:18
Tom, you are correct. There are a couple cases where 1099R income is to be reported as line 7 wages, but does not qualify as taxable comp for IRA contribution purposes. One is pre retirement age disability income, another is the return of excess elective deferrals
Permalink Submitted by Jennifer Poole on Thu, 2017-05-04 21:28
He said that it was reported on a W-2.
Permalink Submitted by Alan - IRA critic on Thu, 2017-05-04 22:12
If reported on a W-2, the Box 1 amount less Box 11 is taxable comp for IRA contribution purposes.