Key Takeaways
- Traditional IRA: Tax-deductible contributions (if eligible), taxable withdrawals.
- Roth IRA: After-tax contributions, tax-free qualified withdrawals.
- 2024-2025 IRA contribution limit: $7,000 ($8,000 if age 50+).
- Roth IRA has NO RMDs for the original account owner.
- Roth qualified distribution: Account open 5+ years AND age 59½, death, disability, or first home.
- Roth withdrawal order: Contributions first (tax-free), then conversions, then earnings.
- SEP-IRA: Employer contributions up to 25% of compensation or $69,000.
- SIMPLE IRA: $16,000 employee deferral ($19,500 if 50+) with mandatory employer contribution.
Last updated: December 2025
Individual Retirement Accounts (IRAs)
IRAs provide tax-advantaged savings for retirement with various options to fit different situations.
Traditional vs. Roth IRA
Comparison Table
| Feature | Traditional IRA | Roth IRA |
|---|---|---|
| Contributions | Pre-tax (may be deductible) | After-tax (not deductible) |
| Tax on Growth | Tax-deferred | Tax-free |
| Qualified Withdrawals | Fully taxable as ordinary income | Completely tax-free |
| RMDs for Owner | Required at age 73 | NOT required |
| Income Limits | For deductibility | For contributions |
| Age Limit | None | None |
| Early Withdrawal | 10% penalty + tax | Contributions: penalty-free; Earnings: penalty + tax |
IRA Contribution Limits (2024-2025)
| Age | Annual Limit |
|---|---|
| Under 50 | $7,000 |
| 50 and older | $8,000 ($7,000 + $1,000 catch-up) |
Contribution Rules
| Rule | Details |
|---|---|
| Earned Income | Must have earned income at least equal to contribution |
| Combined Limit | Limit applies to Traditional + Roth combined |
| Deadline | April 15 of following year |
| Spousal IRA | Non-working spouse can contribute based on other spouse's income |
| Age Limit | No age limit for contributions |
Roth IRA Rules
Qualified Distributions (Tax-Free)
To be qualified, a distribution must meet BOTH requirements:
1. Five-Year Rule: Account has been open 5+ years
2. Qualifying Event:
- Age 59½ or older
- Death
- Disability
- First-time home purchase ($10,000 lifetime limit)
Roth IRA Withdrawal Order
Roth withdrawals come out in a specific order:
| Order | Source | Tax/Penalty |
|---|---|---|
| 1st | Regular contributions | Always tax-free, penalty-free |
| 2nd | Conversion amounts (FIFO) | No tax; 10% penalty if within 5 years of conversion |
| 3rd | Earnings | Tax + 10% penalty if not qualified |
Key Roth Advantages
| Advantage | Benefit |
|---|---|
| No RMDs | Never forced to withdraw |
| Tax-free growth | Earnings never taxed if qualified |
| Access to contributions | Can withdraw contributions anytime |
| Estate planning | Beneficiaries receive tax-free |
Roth IRA Income Limits (2024)
| Filing Status | Full Contribution | Reduced Contribution | No Contribution |
|---|---|---|---|
| Single/HOH | < $146,000 | $146,000 - $161,000 | > $161,000 |
| Married Filing Jointly | < $230,000 | $230,000 - $240,000 | > $240,000 |
Exam Tip: Roth IRAs have NO RMDs for the original owner. This makes them excellent for estate planning because wealth can continue growing tax-free.
Roth Conversions
What Is a Roth Conversion?
Converting Traditional IRA funds to a Roth IRA:
- Pay taxes on converted amount now
- Future growth and withdrawals are tax-free
- No income limits for conversions ("Backdoor Roth")
Conversion Considerations
| Pro | Con |
|---|---|
| Tax-free future growth | Taxes due on conversion |
| No RMDs | Reduces current cash |
| Tax diversification | May increase current tax bracket |
| Good if taxes will be higher later | 5-year rule for conversions |
Backdoor Roth Strategy
For high earners above Roth income limits:
- Contribute to non-deductible Traditional IRA
- Convert to Roth IRA
- Pay tax only on earnings (minimal if converted quickly)
Note: Pro-rata rule applies if you have other Traditional IRA balances.
Employer-Based IRAs
SEP-IRA (Simplified Employee Pension)
| Feature | Details |
|---|---|
| Who Uses | Self-employed, small businesses |
| Contributions | Employer only (no employee deferrals) |
| Limit | Lesser of 25% of compensation OR $69,000 (2024) |
| Vesting | 100% immediately |
| Eligibility | Must cover all eligible employees at same % |
| Deadline | Tax filing deadline plus extensions |
SIMPLE IRA (Savings Incentive Match Plan for Employees)
| Feature | Details |
|---|---|
| Who Uses | Employers with ≤100 employees |
| Employee Deferral | $16,000 ($19,500 if 50+) for 2024 |
| Employer Contribution | Required: 2% nonelective OR 3% match |
| Vesting | 100% immediately |
| Early Withdrawal | 25% penalty if within 2 years |
SEP vs. SIMPLE Comparison
| Feature | SEP-IRA | SIMPLE IRA |
|---|---|---|
| Employee Deferrals | No | Yes |
| Contribution Limit | $69,000 | $16,000-$19,500 |
| Employer Contribution | Required if any contributions | Required |
| Eligibility | Any employer | ≤100 employees |
| Early Withdrawal Penalty | 10% | 25% (first 2 years) |
IRA Rollovers and Transfers
Direct Rollover (Trustee-to-Trustee)
| Feature | Details |
|---|---|
| How It Works | Funds go directly between custodians |
| Withholding | No mandatory withholding |
| Time Limit | None |
| Frequency | Unlimited |
60-Day Rollover
| Feature | Details |
|---|---|
| How It Works | You receive funds, redeposit within 60 days |
| Withholding | 20% mandatory from employer plans |
| Time Limit | 60 days |
| Frequency | Once per 12 months (per IRA) |
Exam Tip: Direct rollovers are preferred—no withholding and no time limit. With 60-day rollovers, you must replace any withheld taxes to avoid treating that amount as a distribution.
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Test Your Knowledge
A Roth IRA has been open for 6 years and the owner is age 55. A withdrawal of earnings would be:
A
B
C
D
Test Your Knowledge
What is the maximum SEP-IRA contribution for 2024?
A
B
C
D
Test Your Knowledge
Which statement about Roth IRAs is TRUE?
A
B
C
D
Test Your Knowledge
When withdrawing from a Roth IRA, which comes out FIRST?
A
B
C
D
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9.3 ERISA and Fiduciary Obligations
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