21 Dec How to Invest VA Disability Money
Something that remains constant for both service members and civilians is financial security and how they will survive post-retirement. While civilians are provided with several opportunities to build up their finances, military retirees might face some hindrances. However, you might be all sorted for Veterans receiving VA disability money or compensation.
Veterans who have a service-related disability might qualify for tax-free VA disability compensation that can pay up to $3,400 every month. But the question is, can you invest your VA disability money?
Can I Invest My VA Disability Money?
Before we go on and explain how to invest VA disability money, let’s take a look at “earned income.”
According to the rules defined by IRS, taxable wages, salary checks, tips, and other forms of paychecks are considered earned income. Further, while earning your disability pay before you reach 65 can be regarded as earned income, things change once you cross that age group. Money earned from VA disability compensation, VA pension, child support, and social security pension is not considered earned income.
This means that with this money, you cannot invest in an IRA, 401(k), 403(b), or 457(b). However, while your options, as a disabled Veteran, are limited, there’s still hope.
You can invest in other places and earn significantly well post-retirement.
So, what are your investment options?
To find the best investment options as a Veteran, here’s what you need to consider–
- Is there a time frame for when you will need this money?
- Why are you investing?
- How much risk are you willing to take?
Also, start with understanding your options. Never invest in something you have no clue about. If you want to work with a professional, make sure that they are registered and certified. While you can invest independently, taking the help of a pro-investor can decrease the risk factor.
Investment Options for VA Disability Money
There are several ways through which you can invest your VA disability money. Here are some of the most common options:
ABLE Accounts/529A Accounts
An Achieve Better Life Experience (ABLE) account, or 529A account, is a tax benefit savings account that allows people suffering from a disability before they turn 26 to invest their money. These accounts are administered state-by-state and were initiated in 2014.
ABLE accounts let individuals and their families save up to $15,000 entirely tax-free. You can also make lifetime contributions up to $100,000 without affecting other benefits like Medicaid, Supplemental Social Security, and Supplemental Nutrition Assistance Program.
You can use this money for qualified disability expenses like transportation, housing, employment training, education, healthcare, personal support services, and costs to improve quality of life. Additionally, you don’t need to have earned income to qualify for this program.
To qualify for an ABLE account, you must have a disability before you turn 26 and be able to meet the following conditions:
- You receive SSI or SSDI.
- You have a certified medical practitioner letter that states that you are disabled.
- You suffer from at least one of the Social Security Administration’s Compassionate Allowances Conditions.
You’ll need the following information to open an ABLE account:
- Social Security Number
- Date of birth
- Email Address
You might also need your family’s information if they apply on your behalf. Also, if you wish to receive electronic payments, you must provide bank account and routing numbers.
An annuity is where you pay a lump-sum amount and, in return, receive regular payments. You can opt for this return immediately or set a date in the future. It comes with benefits like no contribution limits and no required distributions.
If you have withdrawal the earnings before turning 59½, your earnings would be subject to ordinary income rates. An additional 10% early withdrawal penalty might also apply.
However, despite the deductions, after-tax annuities can be a great option to earn a stable income. Before deciding on this investment option, it’s recommended that you research it and get the help of an investment professional.
It’s a known fact that people without earned income cannot open an Investment Retirement Account (IRA). However, a spousal IRA allows a working spouse to contribute to an IRA on behalf of a spouse with little-to-no income.
To qualify for this option, the working spouse’s income must be equal to or exceed the total contributions made to an IRA on behalf of both spouses. You must also file a joint tax return.
You can contribute up to $12,000 annually or $14,000 if you are 50 or older. These accounts are a great way almost to double your savings when you retire. However, they might be subjected to annual contribution limits, catch-up contribution provisions, and income limits. You can not open an IRA in both names, but spouses can share their savings post-retirement.
One of the most common types of investment is opening a regular brokerage account and investing in mutual funds, individual stocks, bonds, and ETFs. However, this form of investment is not tax-sheltered. Meaning, you would have to pay taxes on the interest earned and gains from the sale of assets.
But, the plus side is that you can lower your taxes by using low turnover exchange-traded funds or mutual funds. Also, if you hold your assets for more than a year, you can gain at a long-term capital gain rate of 0%-20%.
In addition, you can make withdrawals at any time you like, and there’s absolutely no limit on how much you can save.
Exchange-Traded Accounts are funds that track a specific sector or a commodity and are bought and sold on a stock exchange market. The only difference between a stock and an ETF is that ETF prices can fluctuate several times a day. Additionally, unlike ETFs, mutual funds are sold only once a day, whereas an ETF can be bought and sold several times a day.
To get started with ETFs, you need to find an online investing platform. You can start with online apps like Robinhood or retirement account provider sites. The next step is to research ETFs. Several funds are available in the market, like stock ETFs, industry ETFs, and commodity ETFs. Before investing, you need to consider the following things-
- What will be the time frame?
- What is your goal for investing?
The last step is to consider a trading strategy.
What Are the Tax Implications for Investing Your Disability Payments?
Tax implications differ depending on the type of investment you opt for.
ABLE Account Taxes
Earnings made on an ABLE account remain untaxed as long as they are used for “qualifying disability expenses” like-
- Medical expenses
- Education and job training
- Assistive technology
- Special-needs transportation
- Legal and administrative fees
However, if you use these contributions for some other purposes, you would be required to pay income tax on the amount you withdrew from the account. Additionally, a 10% tax penalty might also apply.
Brokerage Account Taxes
There are three types of brokerage accounts: traditional retirement accounts, Roth retirement accounts, and taxable non-retirement brokerage accounts. Different types of accounts have different tax implications.
All retirement accounts are tax-deferred. This means that you would not have to pay tax on the income earned by these accounts. However, in the case of a non-retirement brokerage account, all investment earnings and capital gains will be considered taxable income.
Exchange-Traded Accounts Taxes
Unlike mutual funds, ETFs have a favorable tax structure. The tax mostly depends upon how long you hold the asset. If you own the security for more than a year, you would be eligible for long-term capital gains. In this case, you would be required to pay a tax of up to 20%, plus an additional 3.8% Net Investment Income Tax.
If you hold the asset for less than a year, you would be eligible for short-term capital gains, where you would be required to pay ordinary tax rates of 38%, plus an additional 3.8% Net Investment Income Tax.
How to Choose the Right Investment for Your VA Disability Money
Choosing the suitable investment for your VA disability pay depends upon your needs. Before you make a choice, you must consider the following tips:
- Take some time to study your needs. There are several ways through which you can invest your disability money. Therefore, it’s crucial to figure out what you want before choosing.
- Learn as much as you can before you actually invest.
- Build a budget and investment strategy.
- If you are facing some difficulties, you can take the help of a professional.
- Beware of frauds and scams.
If you are a disabled Veteran, ABLE might be the right choice for you. With this, you can spend the earnings on your disability needs without paying any taxes. However, if you are looking for diversification, investing in ETFs and mutual funds is the best option.
Keep Your Financial Goals in Mind When Investing VA Disability Money
Before investing, there are a few things you might want to keep in mind-
- How soon will you need this money?
- What is your motivation for investing?
- What level of risk are you comfortable with?
Understanding your options is another crucial step. Do not invest in something you do not understand. Contact a professional who is certified and registered for assistance if you need help evaluating potential investments.