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I am 50, single and living California. I was disabled many

years ago, I am living...
I am 50, single and living California. I was disabled many years ago, I am living on a string.
In 2010, my last employer finally suddenly approved me a lump-sum retroactive disability compensation, which I am now tax-liable for. Should I begin a Roth, IRA or SEP now to offset my upcoming taxes on this one-time amount, and what is the minimum/maximum contribution? I will only be able to contribute small amounts in the future until my financial circumstances change dramatically. Otherwise, I will just be handing back the amount I've finally been paid to the IRS.
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Answered in 14 hours by:
1/4/2011
CGCPA
CGCPA, CPA
Category: Tax
Satisfied Customers: 3,820
Experience: over 40 years experience in tax matters
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Welcome to Just Answer. I am here to help you resolve your tax and finance concerns. Please feel free to ask anytime you need extra help.

 

A Roth IRA will not serve your needs since it is funded with nondeductible money. A traditional IRA is funded with tax deductible money. This is the one I would recommend if you are seeking current tax savings. The limit is $6,000 for you. However, there may be a problem. IRA accounts can only be deductible to the extent of your earned income. The IRS defines earned income as income from work (W-2 or self employed). If you do not have that an IRA will not resolve your tax issue.

 

If an IRA will not work for you please let me know and we can see if there are any other avenues for you to follow.

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Customer reply replied 6 years ago
Hmm. I also currently receive regular, private Long Term Disability Benefits reported by W-2, which are fully taxable and are farily significant. Will this qualify as earned income?

Also, I attend college part time. I haven't determined if this restricts me from using an IRA to offset my taxes either.

Please advise, and thank you for the research.
Disability benefits do not usually qualify as earned income however, if your are being reported on a W-2 they are being treated as a salary continuation and will count. If the payments are being reported on a 1099 form they will not qualify. The education does not disqualify you from an IRA deduction and will also qualify you for the education credits.
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