Social Security pays monthly benefits to retirees and people with disabilities. The amount of the benefit depends on your lifetime earnings, and to qualify you must pay Social Security payroll taxes on your income. Social Security provides only a minimum standard of living for most people, so opening an individual retirement account (IRA) for your personal savings as well is a good idea.
Individual Retirement Accounts
There are two basic types of IRAs. You can open or contribute to a traditional IRA in any year before the year in which you reach the age of 70 1/2. The traditional IRA allows you to contribute money that is tax-deductible. The money grows tax-free until you withdraw it; the IRS will levy a 10 percent penalty on withdrawals before you reach the age of 59 1/2, unless you withdraw the money for a specific purpose such as education, the purchase of a first home or medical bills.
There is no maximum age limit for opening or contributing to a Roth IRA. The Roth does not allow tax deductions on contributions, but allows tax-free withdrawals after you reach 59 1/2. The early withdrawal penalty also applies to a Roth.
The IRS also limits contributions, depending on your age. As of the time of publication, you may contribute a maximum of $5,000 or the amount of your taxable income, whichever is less, to all IRA accounts before age 50; after 50 your contribution limit rises to $6,000 a year or the amount of your taxable income, whichever is less. Taxable income does not include Social Security benefits.
Social Security Benefits
The Social Security Administration pays monthly benefits if you have reached retirement age, which varies with your birth year, or if you can prove that you are disabled and unable to work. You can draw a lower retirement benefit if you retire before your full retirement age, as early as age 62. You can draw Social Security and still contribute to an IRA; the IRA balance does not affect the amount of your disability or retirement benefit. You may continue IRA contributions if you are on disability, and you may make withdrawals from the IRA as well, subject to the IRS rules and in the case of a conventional IRA, income taxes. If you are on disability, your benefit converts to a retirement benefit when you reach full retirement age, and the disability case closes.
Taxes and Rollovers
You may pay taxes on your Social Security benefits, depending on the amount of your other income from wages and tax-exempt investments, such as municipal bonds or Series EE savings bonds. In figuring the amount of taxes you owe on your Social Security, you do not include withdrawals from a Roth IRA; however, you must include income from a traditional IRA.
If you convert a traditional IRA to a Roth, you must report the rollover to the IRS and you have to pay income tax on the investment gain you had in the old IRA. This can increase the amount of taxes you have to pay in the year you made the conversion. If you convert that traditional IRA to the Roth, however, you shelter the new IRA from income tax when you eventually begin to withdraw from it.
Supplemental Security Income
The Social Security Administration also runs Supplemental Security Income (SSI) for people with disabilities. You may be eligible for SSI benefits even if you haven't worked, but SSI is a means-tested program that limits your personal assets. If you are single with more than $2,000 in savings and property, or married with more than $3,000 in such assets, you will not be eligible for SSI. Social Security counts all IRA assets toward this limit.