Author Topic: Windfall rules for young person collecting SS disability  (Read 1273 times)

SunshineAZ

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Windfall rules for young person collecting SS disability
« on: January 26, 2019, 05:33:42 PM »
Hi Mustachians,

I have a younger relative (30) who is currently receiving social security (SSDI/SSRI) due to discovering a neurological brain disorder (Chiari Malformation) about 7 years ago.   He recently cashed out some bitcoin that he had for a long time for a 5 figure amount, it is currently sitting in a CD account collecting interest.  He would like to invest it, however, he believes that due to the SSDI, he is forbidden from having any "investment" accounts and if he invests it, any gains will be deducted from his SS payments.  This does not seem right to me, so I am hoping that someone here might know if there are rules like this for people receiving SS payments.  It does not make sense to me that he would be punished for having an investment account. 

He does not have much money and it would be very good for him to be able to put this money away for future medical bills, etc.  He has asked for my advice because he knows that I have investing experience, but I have no experience with SS rules, so any advice would be greatly appreciated.

Thanks in advance!! 

lhamo

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Re: Windfall rules for young person collecting SS disability
« Reply #1 on: January 26, 2019, 05:42:16 PM »
Paging @Tami1982

frugaldrummer

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Re: Windfall rules for young person collecting SS disability
« Reply #2 on: January 26, 2019, 05:48:17 PM »
I believe it depends on whether he is receiving SSDI or SSI.

To receive SSDI you need to have paid into the Social Security system for a number of years, which seems unlikely if he was diagnosed at 23? SSDI does not have an asset limit.

SSI, on the other hand, is for poor people and DOES have an asset limit of $2,000. If he receives SSI he will be required to spend that money down I believe.

https://www.disabilitysecrets.com/page7-5.html

frugaldrummer

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Re: Windfall rules for young person collecting SS disability
« Reply #3 on: January 26, 2019, 05:54:19 PM »
Well, the number of work credits required for SSDI are lower for a young person so he may have SSDI. 
https://www.ssa.gov/planners/credits.html

SunshineAZ

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Re: Windfall rules for young person collecting SS disability
« Reply #4 on: January 26, 2019, 06:59:57 PM »
frugaldrummer - Thank you for your links.  I have been reading them and getting some useful information, but I haven't heard back from him about when he was officially deemed "disabled", which makes a huge difference regarding the rules.  He did have a good job for several years before getting the disabling headaches and being diagnosed, so he might be SSDI, but it sounds like the rules he thinks apply are for SSI.  I am waiting to hear from him to determine exactly what he is on. 

I don't know if this is relevant, but when he was first having medical issues, he was on short term disability with his employer and they illegally fired him and were then sued by social security on his behalf and were required to reinstate him and pay SS a very large settlement, he was given a small amount of the settlement which covered his medical expenses and the rest is somehow in trust with SS(??) and he is being paid out of that settlement.  (He also has a daughter, who lives with her mother, who is receiving part of his SS payment as child support.)

SunshineAZ

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Re: Windfall rules for young person collecting SS disability
« Reply #5 on: January 26, 2019, 10:13:07 PM »
Update:  I finally got to talk to him, he was declared disabled at 23 but had been working since he was 16, so it appears he is on SSDI, which should not be a problem if he wants to invest the funds. 

Is there any way to verify he is able to invest this money without causing any issues with his SSDI?  Would it make a difference if it is pre-tax or after tax?  He says they forced him to close his 401k account when he was first put on SS.

Thanks!

terran

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Re: Windfall rules for young person collecting SS disability
« Reply #6 on: January 27, 2019, 07:05:41 AM »
Just to be clear, it's not the investing that's the problem. Owning anything of value (except a few excluded categories) including the original bitcoin would require a spend down before SSI benefits would resume if the Social Security Administration knew about it. Getting him to confirm whether he receives SSI or SSDI is the important point here. It's also possible to receive some of both if the SSDI is below what he would receive under SSI then he'll get SSDI which wouldn't be subject to asset limits and some SSI to top him up to the SSI limits.

It looks like he could sign up for a My Social Security account and get a "benefit verification letter."

Even if he is on SSDI, I would proceed with caution to make sure having assets won't impact his health insurance. I think that might depend on whether his state has expanded medicaid?

If he does find that his benefits are subject to asset limits, since he was under 26 when he became disabled, he could open a 529 ABLE account to put the money in and invest. Up to $100k is excluded from SSI asset tests and you don't pay taxes on the investments. On the downside, what the money can be spent on is restricted, the fees on the investments are higher than they are in other account types, there are fewer investment options, and when he dies the account is subject to forfeiture to the government to repay past benefits (at least medicaid, I'm uncertain about other benefits).

* Edited to add more information
« Last Edit: January 27, 2019, 07:14:58 AM by terran »

Dr Kidstache

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Re: Windfall rules for young person collecting SS disability
« Reply #7 on: January 27, 2019, 08:49:44 AM »
SSDI does not have asset limitations of any kind. The only limitation is on earned income. I'm on SSDI and I have investments accounts as well as W2 income from long-term disability benefits. It's completely irrelevant for SSDI.

2 caveats:

1) Some SSDI recipients are considered incompetent to manage their own finances and must have a representative payee. This representative payee (an individual or an organization) receives the benefit check and manages finances. I don't understand that whole trust thing that you mentioned or why he would have to close a 401k. Neither of those things sound consistent with SSDI. Could it be that he has a representative payee?

2) If he is receiving Medicare through SSDI, then Medicare determines premiums based on your income on your tax returns 2 years ago. So, anything that increases his AGI could increase his Medicare premiums in the future.

SunshineAZ

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Re: Windfall rules for young person collecting SS disability
« Reply #8 on: January 27, 2019, 08:51:30 AM »
Thanks terran!  I did speak with him and he is on SSDI, so it sounds like it should not be an issue. 

SunshineAZ

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Re: Windfall rules for young person collecting SS disability
« Reply #9 on: January 27, 2019, 09:03:09 AM »
SSDI does not have asset limitations of any kind. The only limitation is on earned income. I'm on SSDI and I have investments accounts as well as W2 income from long-term disability benefits. It's completely irrelevant for SSDI.

2 caveats:

1) Some SSDI recipients are considered incompetent to manage their own finances and must have a representative payee. This representative payee (an individual or an organization) receives the benefit check and manages finances. I don't understand that whole trust thing that you mentioned or why he would have to close a 401k. Neither of those things sound consistent with SSDI. Could it be that he has a representative payee?

2) If he is receiving Medicare through SSDI, then Medicare determines premiums based on your income on your tax returns 2 years ago. So, anything that increases his AGI could increase his Medicare premiums in the future.

Thank you for the information.  I am beginning to think the confusion is that when he was first having medical issues he was temporarily put on SSI until his claim was fully approved for SSDI.  That is the only explanation I can think of that makes sense.  Although I agree that it seems odd to me that they would force him to close his 401k at that time since it was pending.  He may have been given bad advice. 

Since he is on SSDI, and doesn't really have to worry about a lower tax bracket in "retirement", I was going to recommend he put the money in an after-tax account (Vanguard) and reinvest the dividends until needed.  He will probably never reach the max amount for the long term capital gains to impact his tax bracket.  Also, the money would be available to him whenever he needs it, without penalty.  And to be honest, with his medical issue, he might not ever reach retirement age.

If there is a reason I am missing for putting it in an IRA, please let me know. 

Dr Kidstache

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Re: Windfall rules for young person collecting SS disability
« Reply #10 on: January 27, 2019, 09:32:35 AM »
Just a quick clarification - SSDI recipients of any age become Medicare-eligible after 24 months of SSDI payments. So he may be on Medicare currently (not sure how long he's been on SSDI or if he is instead on Medicaid). It doesn't sound like he'll be at risk of higher premiums or shifting from Medicaid to Medicare due to an increase in AGI. But just wanted to clear up that SSDI recipients get Medicare way before "retirement" age.

As for where to put the money, I don't have any specific recommendations. He's lucky to have someone looking out for his best interests. It sounds like he must not anticipate needing the money anytime soon since you are considering investing it. I would just make sure that the money goes into an account or an investment that he understands. The little info that you've shared regarding bitcoin, 401k closing, mystery trust, etc suggests that simpler would be safer for him even at the risk of it not earning much, like a savings account or money market/CD. A Vanguard taxable account is super-basic for most anyone in this forum but might not be for him with his baseline financial knowledge. As for IRAs, he could also put it in an IRA. There is no penalty for early IRA withdrawals if you are disabled.

RedwoodDreams

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Re: Windfall rules for young person collecting SS disability
« Reply #11 on: January 27, 2019, 10:01:33 AM »
Re: Medicare. Assuming he's on Medicare now because he crossed the 24-month mark, make sure he has also purchased a Medi Gap policy to cover the 20% of costs not covered by original Medicare (which covers 80%). If he doesn't, but has significant medical costs, that could eat up his nest egg very quickly. I'm also on SSDI but under age 65, and I don't know if it varies by state, but I  wasn't able to purchase a Medicare Advantage Plan, only a Medi Gap policy.

I also purchased a Part D prescription plan.

https://www.medicare.gov/find-a-plan/questions/medigap-home.aspx

SunshineAZ

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Re: Windfall rules for young person collecting SS disability
« Reply #12 on: January 27, 2019, 02:00:40 PM »
Re: Medicare. Assuming he's on Medicare now because he crossed the 24-month mark, make sure he has also purchased a Medi Gap policy to cover the 20% of costs not covered by original Medicare (which covers 80%). If he doesn't, but has significant medical costs, that could eat up his nest egg very quickly. I'm also on SSDI but under age 65, and I don't know if it varies by state, but I  wasn't able to purchase a Medicare Advantage Plan, only a Medi Gap policy.

I also purchased a Part D prescription plan.

https://www.medicare.gov/find-a-plan/questions/medigap-home.aspx

Thanks for the tip, I will ask him about his medical insurance and make sure he knows about both. 

SunshineAZ

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Re: Windfall rules for young person collecting SS disability
« Reply #13 on: January 27, 2019, 02:07:05 PM »
Just a quick clarification - SSDI recipients of any age become Medicare-eligible after 24 months of SSDI payments. So he may be on Medicare currently (not sure how long he's been on SSDI or if he is instead on Medicaid). It doesn't sound like he'll be at risk of higher premiums or shifting from Medicaid to Medicare due to an increase in AGI. But just wanted to clear up that SSDI recipients get Medicare way before "retirement" age.

As for where to put the money, I don't have any specific recommendations. He's lucky to have someone looking out for his best interests. It sounds like he must not anticipate needing the money anytime soon since you are considering investing it. I would just make sure that the money goes into an account or an investment that he understands. The little info that you've shared regarding bitcoin, 401k closing, mystery trust, etc suggests that simpler would be safer for him even at the risk of it not earning much, like a savings account or money market/CD. A Vanguard taxable account is super-basic for most anyone in this forum but might not be for him with his baseline financial knowledge. As for IRAs, he could also put it in an IRA. There is no penalty for early IRA withdrawals if you are disabled.

Fortunately, he is mentally capable of handling an investment account, but he is really naive about the whole investing thing, and I am trying to fix that.  I was going to suggest keeping 25% of the money in bonds/CD/money market, etc. and put the rest in VTSMX or similar.  That way he has some available in case of an emergency and the rest for later needs.

*edited for clarification
« Last Edit: January 27, 2019, 03:42:07 PM by SunshineAZ »