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Retirement planning and SSDI

By Jennie L. Phipps ·
Tuesday, February 22, 2011
Posted: 4 pm ET

More people than ever are applying for Social Security Disability Insurance, or SSDI. According to Social Security's own statistics, the average number of applications per month has risen from 200,000 prior to 2008 to more than 300,000 per month since.

Getting SSDI can take years from the time of initial application and the average monthly benefit of $1,067 isn't enormously generous. But for many people, applying is smart retirement planning and is worth the cost and aggravation because receiving SSDI freezes Social Security calculations and years of unemployment won't be factored in. Therefore, the recipient of SSDI who transitions to regular Social Security at retirement age usually will get a higher benefit than he would if he had simply been unemployed.

When the SSDI approval finally arrives, the recipient will likely get a substantial pot of money -- and owe federal and possibly state taxes on that income. If you find yourself in this situation, Paul Gada, a tax attorney and personal financial planning director for the Allsup Disability Life Planning Center, advises wending your way carefully through the process of paying these taxes on the lump sum. Paying taxes on the whole amount in one year is a big mistake, Gada says, because it will push you into a higher tax bracket and raise your tax bill significantly.

The IRS allows taxes on this lump-sum payment to be spread over previous tax years using the current-year tax return -- you don't have to file any amended returns. To read what the IRS says about paying taxes on a lump-sum disability benefit, download IRS Publication 915. This is complicated stuff. If you feel comfortable using tax software, the more sophisticated programs will walk you through it. But it may be wise to get help from a knowledgeable tax preparer who understands the tax implications of lump-sum disability distributions.

It is also smart to deduct the costs of seeking the SSDI benefits. If you hired an attorney or a company like Allsup to help you get your SSDI benefits, you can deduct the fee that you paid your representative when figuring out the taxability of the lump-sum SSDI payment you received.

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February 28, 2011 at 1:57 am

Have advised disabled friends to apply. Sadest was a friend who called to say he had been approved immediately..I knew that meant he was dying. He died before the first check came.