It's perfectly legal to collect Social Security benefits while you're also paying into an IRA. Unfortunately, Social Security income does not count as "compensation," which you must have to be eligible to contribute to an IRA, so you need other income in addition to your benefits. Earning money, in turn, may affect your Social Security benefits. The interaction between Social Security and your IRA will vary with your situation.
The absolute limit on IRA contributions, as of 2013, is $5,500, or $6,500 for those age 50 and above. A secondary limit is that you can only contribute "compensation" -- money you earn from work. Even if you've worked for years to earn Social Security, that doesn't count. Wages, commissions, salaries, tips and self-employment income all qualify, and so does alimony. If, say, you're living primarily on Social Security disability but you earn $1,300 this year part-time, $1,300 is the limit of what you can put in an IRA.
Earnings and Social Security
The catch in earning enough to fund your IRA is that your earnings may reduce your Social Security benefits. This doesn't happen after full retirement age, when the government lets you work without cutting benefits. At a younger age, however, the more you earn, the less you get in benefits. In 2013, for instance, Social Security survivor benefits get cut $1 for each $2 you earn above $15,120. Money you contribute to an IRA counts against this limit, as it's part of your gross salary.
If you're subsisting mostly or entirely on Social Security income, your spouse may be able to contribute to your IRA for you. The IRS allows spouses to put money in each other's IRAs, up to the regular limit. If you can't earn money this year, for instance, your spouse can contribute $5,500 to your account as well as her own, provided she earns at least $11,000 in compensation. If you each have multiple IRAs, the $5,500 limit applies to the sum of all contributions in each person's accounts. If you put $5,500 in one of your IRAs, you can't contribute to your other accounts this year.
If Social Security doesn't pay enough to cover the bills, withdrawing from your IRA is an option to help keep things going. You have the right to withdraw from a traditional IRA at any time, though you have to pay tax on withdrawals and, if you're under retirement age, a 10 percent penalty. Roth IRAs are even easier: you've paid tax on your contributions, so you're always free to take them out, tax-free. Roth earnings are taxable and subject to the 10 percent penalty, however, if you make a pre-retirement withdrawal. IRA withdrawals don't affect the amount of your benefits.
- Jupiterimages/Brand X Pictures/Getty Images