Can Disabled People Have a 401(k)?

It’s better not to rely on Social Security alone to take care of you in your golden years – even if you’re already receiving ample disability benefits in your younger years. A retirement account such as a 401(k) is an excellent way to set aside money for retirement. However, your ability to have one depends on two main things: your employer’s policies and how much your medical condition affects your ability to work.

A 401(k) is a defined contribution plan offered through an employer that allows you to save up for retirement. It is named thus because employee and employer contributions usually fund it.

If you have a 401(k), you choose how much money in each pay period you want to invest, and your employer automatically moves that amount from your paycheck into your account before you ever see the money. And most times, with the exceptions of Roth 401(k) accounts, the funds come from pre-tax earnings.

Also, employers tend to match a percentage of contributions to incentivize employees to save more for retirement. But there is usually a vesting time that prevents you from accessing your employer’s contributions immediately until it elapses. Vesting ensures that you don’t take the money employers give you and run without providing some years of service.

Your ability to invest in a 401(k) depends, first and foremost, on whether your employer offers such an account. Unfortunately, some employers don’t offer 401(k)s, while others won’t match your contributions. And the number is more significant than you may realize.

Studies show that only ​56 percent​ of employers offer the 401(k) plan to their employees. And even among those who do, about ​49 percent​ will not match employee contributions. So, even if you have a disability and are gainfully employed if your employer does not sponsor a 401k plan, you cannot have it no matter how much you want it.

But if your employer provides it, once you open a 401(k) through your employer, you can fund it and have complete control of where your money goes. So, take your time and decide whether investing in stocks, bonds, mutual funds, or a combination of these investments will work best with your overall retirement plan.

If your disability is debilitating and you cannot work, you won’t have access to the employer-sponsored 401(k) anymore. However, if you can still work part-time or full-time, try to choose an employer that offers a 401(k) to its workers. You can then take advantage of the annual elective deferral limits and save up to ​$19,500​ of your pre-tax income. And if you are 50 or over, you can also save an additional ​$6,500​ as a catch-up contribution.

Also, rest assured that if your disability worsens and you must leave your job, your 401(k) still belongs to you, and you may withdraw from it penalty-free when you reach the age of ​59.5 years​. However, if you meet the criteria of what is defined as total and permanent disability, you can withdraw your money before you reach that age. And you will not be subject to the 10 percent penalty.

If your employer doesn’t offer a 401(k), there are other effective ways to save for retirement. For example, you can use any disability monies you have been awarded, such as court-ordered compensation, to buy a deferred annuity. You could also open a traditional or Roth IRA, which offer tax advantages and allows you to invest in funds of your choice. However, for either of these accounts, you must have some form of earned income.

But to invest in a Roth IRA, your 2021 income cannot exceed ​$140,000​ ​i​f you are single or ​$208,000​ if you are married and filing jointly. You can also open a regular investment account, but this type offers no tax breaks.

An ABLE account is a disability retirement account you should also consider. Together with your family, you can save as much as ​$15,000​ per year in after-tax income through this account. And the best thing about it is you can have up to ​$100,000​ in it without jeopardizing your government disability benefits.

Having a disability does not automatically exclude you from accessing a 401(k) or other retirement accounts. But you must to ensure your disabled retirement plans won’t reduce your government disability benefits. So, you need to be strategic in saving for retirement or accessing the investment income you already have.