Individual Retirement Accounts

Individual Retirement Accounts (IRAs) provide tax-advantaged savings for individuals outside of employer-sponsored plans. Understanding the different types of IRAs and their rules is essential for Series 7 representatives.

IRA Overview

IRAs are personal retirement accounts that individuals establish and fund themselves (though some employer plans use IRA structures).

2025 IRA Contribution Limits

Key Points:

• The contribution limit applies across ALL IRAs (Traditional + Roth combined)
• Must have earned income at least equal to contribution
• Deadline to contribute: April 15 of the following year

Traditional IRAs

Traditional IRAs offer tax-deductible contributions and tax-deferred growth.

Traditional IRA Tax Treatment

Deductibility Rules

Whether contributions are tax-deductible depends on:

1. Covered by employer plan? — If yes, income limits apply
2. Filing status and income — Phase-out ranges determine deductibility

2025 Deduction Phase-Out (If Covered by Employer Plan)

Not Covered by Employer Plan: Full deduction available regardless of income (unless spouse is covered, then separate phase-out applies).

Traditional IRA Distribution Rules

Roth IRAs

Roth IRAs offer tax-free growth and tax-free qualified distributions.

Roth IRA Tax Treatment

Roth IRA Eligibility (Income Limits)

Unlike Traditional IRAs, Roth IRAs have income limits for contributions:

2025 Roth IRA Phase-Out Ranges

Backdoor Roth: High earners may use non-deductible Traditional IRA contributions followed by Roth conversion (consult tax advisor).

Qualified Distributions from Roth IRAs

For tax-free treatment, distributions must be "qualified":

1. 5-Year Rule — Account open for at least 5 years
2. Age 59½ OR disability, death, or first-time home purchase ($10,000 lifetime)

Roth IRA Distribution Order

When withdrawing from a Roth IRA:

1. Contributions first — Always tax-free, penalty-free
2. Conversions second — Tax-free, but 5-year rule for penalty-free
3. Earnings last — Need qualified distribution for tax-free

Key Advantage: No RMDs for Roth IRAs during the owner's lifetime.

Traditional vs. Roth IRA Comparison

When to Choose Each

Traditional IRA may be better if:

• You expect lower tax rates in retirement
• You need the current tax deduction
• You're not eligible for Roth due to income

Roth IRA may be better if:

• You expect higher tax rates in retirement
• You want tax-free income in retirement
• You don't need RMDs
• You're younger with a longer time horizon

IRA Rollovers and Transfers

Direct Transfer (Trustee-to-Trustee)

Direct transfers move funds between IRAs without the owner taking possession:

• No tax withholding
• No 60-day deadline
• Unlimited transfers allowed
• Preferred method

Indirect Rollover (60-Day)

Indirect rollovers involve the owner receiving the funds:

Warning: With 20% withholding, you must make up the difference from other funds or owe taxes on the withheld amount.

Early Withdrawal Penalty Exceptions

The 10% early withdrawal penalty does NOT apply for:

Key Point: Even without the penalty, distributions from Traditional IRAs are still taxed as ordinary income.

On the Exam

The Series 7 exam frequently tests:

• Contribution limits and eligibility rules
• Traditional vs. Roth tax treatment
• RMD rules and ages
• Early withdrawal exceptions
• Rollover rules (60-day, one-per-year)