Individual Retirement Accounts (IRAs)

IRAs provide tax advantages for retirement savings outside of employer plans. Understanding the differences between Traditional and Roth IRAs is essential for making suitable recommendations.

2025 IRA Contribution Limits

Important: This is the COMBINED limit for Traditional AND Roth IRAs (not each).

Traditional IRA

Tax Treatment

Deductibility Rules

If NOT covered by employer retirement plan: Full deduction regardless of income

If covered by employer plan (2025 phase-outs):

If spouse is covered (but you are not):

• Phase-out: $236,000 - $246,000 MAGI (MFJ)

Key Rules

• Contribution deadline: Tax filing deadline (April 15)
• RMDs required: Beginning at age 73
• Early withdrawal penalty: 10% before age 59½ (exceptions apply)
• Earnings taxable: All distributions taxed as ordinary income

Roth IRA

Tax Treatment

Income Limits (2025)

Qualified Distribution Requirements

A distribution is tax-free if BOTH conditions are met:

1. 5-Year Rule: Account has been open for at least 5 years
2. Qualifying Event:
   • Age 59½ or older
   • Death
   • Disability
   • First-time home purchase (up to $10,000 lifetime)

Key Advantages

Traditional vs. Roth IRA Comparison

Roth Conversion

Converting Traditional IRA to Roth IRA:

• Pay taxes on converted amount in current year
• No income limits on conversions (unlike contributions)
• No 10% early withdrawal penalty on conversion amount (but may apply to earnings if withdrawn within 5 years)
• Consider converting in low-income years

Backdoor Roth Strategy

For high earners above Roth income limits:

1. Contribute to non-deductible Traditional IRA
2. Convert to Roth IRA
3. Pay tax only on gains (if any) since contribution

Caution: Pro-rata rule applies if you have other Traditional IRA balances.

Other IRA Types

SEP IRA

SIMPLE IRA

In Practice

When recommending IRAs:

• Traditional: Best if expecting lower tax bracket in retirement
• Roth: Best if expecting same or higher tax bracket in retirement
• Consider tax diversification (having both types)
• Roth is generally better for younger clients (more time for tax-free growth)
• No RMDs for Roth = excellent estate planning tool

On the Exam

Series 65 frequently tests:

• Roth vs. Traditional tax treatment differences
• Income limits for Roth contributions
• The 5-year rule for qualified Roth distributions
• That Roth IRAs have NO RMDs during owner's lifetime

Key Takeaways

1. 2025 IRA limit: $7,000 ($8,000 if 50+)—combined for all IRAs
2. Traditional: tax-deductible contributions, taxable distributions
3. Roth: after-tax contributions, tax-free qualified distributions
4. Roth income limits: $150K single / $236K MFJ (2025)
5. Roth has NO RMDs during owner's lifetime
6. Roth contributions (not earnings) can be withdrawn anytime tax/penalty-free