Disability can happen at any time to anyone. It does not discriminate and can come either unexpectedly or gradually. Either way, if you’re disabled and find it hard to navigate financially, the following information may be useful in helping you decide what your next step is, or how to best manage the various parts of your financial life. Note that the definition of disability differs depending on which organization you’re dealing with which can add another layer of complexity.
Claiming Disability Insurance Benefits
Many employer benefits packages offer short term and long term disability income insurance policies. If you had such a plan with your employer talk with your HR department about starting a claim. Not all disability income insurance policies are bought through an employer plan as they can be bought out in the marketplace. What often surprises people is that the benefit may be taxable. Taxation of the benefits depends on how the premiums were paid. Benefits are taxable at your ordinary income tax bracket if premiums were paid with pre-tax dollars, they are only received tax-free when premiums were paid with after-tax dollars.
When reviewing your policy you might find that your benefit payment could be adjusted lower as an offset from either SSI or SSDI payments. This is only possible if it was written into your policy, so be sure to review your policy for verbiage such as having the “Right to Offset”, or as having “integrated” benefit payments. This simply means the policy can lower your benefit payment $1 for $1 for every dollar received from SSI or SSDI.
While reviewing your policy, you should confirm the length of time benefits will be paid. Some plans only last for 2 or 5 years, while some last until age 65 or 67.
Claiming SSI or SSDI
Disabled individuals may qualify for government benefits from either SSI (Supplemental Security Income) or SSDI (Social Security Disability Insurance). Both benefit payments are paid to individuals who meet specific eligibility rules set by the Social Security Administration (SSA), but the determining factor of which benefit is paid is based on work history.
SSDI is payable to disabled individuals who have recently worked enough quarters in a job where Social Security taxes were paid. SSI payments are different in that they are paid to individuals who:
· Have not worked enough quarters in a job where Social Security taxes were paid, and
· Have assets below $2,000. (Countable assets include cash, bank accounts, and stocks. Excludable assets are your home, one vehicle, and ABLE account up to $100,000).7
Generally speaking, qualifying for SSDI is more preferable than SSI payments because payments are typically higher. SSDI payments are based on your earnings history, and the benefit is not means tested, whereas SSI payments are capped at $994/mo. for a single individual in 2026 and requires low asset levels.7
You can learn more about the differences between SSI and SSDI payments in our past blog post from March 13, 2023 as well as details on qualifying for either benefit at https://www.ssa.gov/ssi/text-over-ussi.htm
Special Rules When Inheriting Retirement Plans From Non-Spouses
In general, anyone who inherits retirement accounts typically has 10 years from the deceased’s date of death to liquidate the account with distributions generally required to begin by December 31st of the calendar year following the IRA owner’s death. There are a few special exceptions to this requirement which include people who are disabled or chronically ill. For this purpose, individuals are considered disabled if they meet the definition in the Internal Revenue Code Section 72(m)(7) and were disabled as of the IRA owner’s death. The definition of chronically ill is when an individual cannot perform at least two of the six activities of daily living without substantial help from another person for at least 90 days and is not expected to improve, or they need constant supervision because of severe cognitive impairment.5 The special exception allows qualified individuals the ability to stretch-out the required annual withdrawals over their life expectancy using the Single Life Expectancy Table in IRS Publication 590-B, therefore enabling more long-term and tax-deferred growth for the beneficiary. 5
Wavier of the 10% Early Withdrawal Penalty
When it comes to your own personal retirement account, withdrawals made prior to reaching age 59 ½ typically have a 10% Early Withdrawal penalty as well as taxation, but the IRS offers an exception to the penalty for disabled individuals called the Disability Exception for Retirement Accounts. This exception waives the penalty, not taxation, for account-holders who are "totally and permanently disabled" therefore easing the long-term ramifications of making an early withdrawal.1 It should be mentioned that making early withdrawals from a retirement plan should be done cautiously and with professional guidance as the long-term impact of such withdrawals can be very influential in the long-run. Nonetheless, if withdrawals must be made, this provision makes it a little less painful.
Withdrawals from Roth IRAs
As mentioned above, withdrawals from retirement accounts made prior to reaching age 59 ½ typically have a 10% Early Withdrawal penalty. The same goes for Roth accounts, which are retirement accounts that were funded with already-taxed dollars. Generally speaking, withdrawals from Roth accounts start out returning contributions, then, once all the contributions have been withdrawn the withdrawals come from the growth, which is usually taxable and penalized if withdrawn prior to reaching age 59 ½. For disabled individuals, as long as you have owned the Roth IRA for at least five years, both taxes and early withdrawal penalties are waived. If the Roth IRA is not quite five years old then the earnings will be subject to income tax, but there will not be any penalty.3 To qualify for a disability withdrawal from your Roth IRA, you must be unable to engage in any substantial gainful activity due to a physical or mental impairment and the condition must be expected to result in death or for a continuous period of not less than 12 months.3
Special Rules for HSA
Health Savings Accounts (commonly known as HSAs) are cash or investment accounts that accept pre-tax dollars to be used, tax-free, on medical and health expenses. These accounts are exceptionally tax-favorable when used properly and can be very beneficial for disabled individuals in that tax-free withdrawals can be used to modify your home with capital improvements like ramps, door widening, installing handrails, etc. 4 The rules state that ineligible HSA withdrawals must be charged a 20% penalty if withdrawn prior to reaching age 65 in addition to being subject to ordinary income taxes. Forutnately, the rules change slightly for disabled individuals in that the penalty is waived for non-medical/health expenses, though income taxation still applies.
Possible Student Loan Discharge
Many college students receive government-funded loans that have discharge stipulations should the borrower becomes totally and permanently disabled. The following loan types may be discharged if the borrower qualifies for a Total Permanent Disability (TPD) discharge2:
· William D. Ford Federal Direct Loan (Direct Loan) Program loan
· Federal Family Education Loan (FFEL) Program loan
· Federal Perkins Loan
Discharged loans may undergo a three-year post-discharge monitoring period and discharged loan value may be considered income for state tax purposes. It is best to consult with your state tax office or a tax professional before you file your state tax return. 2 Learn more by visiting Studentaid.gov.
Possible Relief from Life Insurance Premiums
Many Americans have separate life insurance policies held outside of their employer’s benefits. These plans often offer additional features that you can buy at the point of sale called Riders. One such Rider is a Waiver of Premium option, which waives the premium if the policyholder becomes disabled. To qualify you must provide medical records, physician’s statements and sometimes Social Security disability determination. Upon approval, some insurance companies will refund premiums paid during the waiting period. Disabilities may include severe injuries, chronic illnesses, degenerative diseases, or mental health conditions that significantly impair daily functioning. Some policies will exclude pre-existing conditions and may require a waiting-period of 3-6 months. If you own a life insurance policy outside of your employer check with your agent to see if your policy was purchased with this Rider included.
Navigating disability can feel overwhelming, but understanding the financial tools available can make the path forward far more manageable. From income protection and government benefits to specialized tax rules, retirement provisions, and insurance features, each resource exists to help preserve stability during a challenging time. The rules can be complex and often vary by program, but with the right information and support, your disability does not have to undermine your financial security.
1 Laurence, Bethany K. “Disability Lets You Withdraw From Your 401(k) and IRA Plans” https://www.disabilitysecrets.com. 23 March 2026.
2 Federal Student Aid. “Total and Permanent Disability Discharge.” Studentaid.gov. 13 May 2026.
3 Fatfire Editorial Team. “Roth IRA Disability Withdrawal: Rules, Benefits, and Considerations.” 18 December 2024. Fatfire.com.
4 Fidelity Investments. “How an HSA Can Help People with Disabilities”. 2020. Fidelity.com
5 LegalClarity Team. “Inherited IRA Disabled Beneficiary: RMDs, Taxes and Trusts.”Legalclarity.com. 1 April 2026.
6 “Supplemental Security Income (SSI) Overview”. https://www.ssa.gov/ssi/text-over-ussi.htm. 18 May 2026.
7 SSI Payment Amounts: How Much Will You Get in 2026? | BenefitsUSA Blog
“SSI Payment Amounts: How Much Will You Get in 2026?” BenefitsUSA.org.