11.2 IRAs, Roth IRAs, and Required Minimum Distributions
Key Takeaways
- The combined Traditional plus Roth Individual Retirement Account (IRA) contribution limit is $7,000 in 2025, with a $1,000 catch-up at age 50 or older.
- Traditional IRA deductibility phases out by Modified Adjusted Gross Income (MAGI) only when the taxpayer or spouse is an active participant in an employer plan.
- A qualified Roth distribution is fully tax-free when a 5-year holding period is met plus a triggering event such as age 59 1/2, death, disability, or first home.
- Roth ordering rules return contributions first (tax- and penalty-free), then conversions, then earnings; the owner has no lifetime Required Minimum Distributions (RMDs).
- Traditional IRA RMDs begin at age 73 under SECURE 2.0; missing an RMD triggers a 25% excise tax (reduced to 10% if corrected timely).
The Two Core IRAs
An Individual Retirement Account (IRA) is a personal, tax-advantaged account a worker funds with earned income. The two exam-critical versions differ in when tax is paid.
| Feature | Traditional IRA | Roth IRA |
|---|---|---|
| Contributions | May be pre-tax (deductible) | Always after-tax |
| Growth | Tax-deferred | Tax-free |
| Qualified distributions | Taxed as ordinary income | Tax-free |
| Income limit to contribute | None | Yes (MAGI phase-out) |
| Lifetime RMDs | Yes, begin age 73 | None for the owner |
Contribution Limits (2025)
| Category | Amount |
|---|---|
| Annual contribution | $7,000 |
| Age 50+ catch-up | $1,000 |
| Total at 50+ | $8,000 |
Trap: The $7,000 limit is combined across all of a person's IRAs. Putting $4,000 in a Traditional IRA leaves only $3,000 for a Roth that year -- not $7,000 in each.
Traditional IRA Deductibility
Anyone with earned income can contribute to a Traditional IRA, but the deduction depends on whether the taxpayer (or spouse) is an active participant in an employer plan and on Modified Adjusted Gross Income (MAGI).
If covered by an employer plan (2025 phase-out):
| Filing Status | MAGI Phase-out |
|---|---|
| Single / Head of Household | $79,000 - $89,000 |
| Married Filing Jointly | $126,000 - $146,000 |
| Married Filing Separately | $0 - $10,000 |
If NOT covered by an employer plan, the contribution is fully deductible at any income, unless the spouse is covered (then a separate higher MFJ phase-out of $236,000 - $246,000 applies).
Worked example: A single filer covered by a 401(k) has MAGI of $84,000. That is the midpoint of the $79,000-$89,000 range, so roughly 50% of the contribution is deductible. The non-deductible portion still grows tax-deferred and creates basis that is recovered tax-free later under the pro-rata rule.
Roth IRA Eligibility and Qualified Distributions
Roth contributions phase out by income (2025):
| Filing Status | MAGI Phase-out |
|---|---|
| Single / Head of Household | $150,000 - $165,000 |
| Married Filing Jointly | $236,000 - $246,000 |
| Married Filing Separately | $0 - $10,000 |
A Roth distribution is qualified -- meaning 100% tax-free -- only when both tests are met:
- The 5-year holding period has passed (measured from the first contribution to any Roth IRA), AND
- A triggering event occurs: age 59 1/2, death, disability, or a first-time home purchase ($10,000 lifetime cap).
Roth Ordering Rules
Non-qualified withdrawals come out in a fixed order, which protects the saver:
- Regular contributions -- always tax-free and penalty-free.
- Conversion amounts -- tax-free (already taxed) but may face the 10% penalty if within 5 years.
- Earnings -- taxable and subject to the 10% early-withdrawal penalty if non-qualified.
Scenario: A 40-year-old contributed $20,000 over the years and the Roth is now worth $26,000. She withdraws $15,000. Because contributions come out first, the entire $15,000 is treated as a return of contributions: no tax and no penalty.
Penalty Exceptions and Rollovers
The 10% early-withdrawal penalty before age 59 1/2 is waived for specific events on both IRA types:
- Death or total/permanent disability
- Medical expenses above 7.5% of Adjusted Gross Income (AGI)
- Health insurance premiums while unemployed
- Qualified higher-education expenses
- First-time home purchase ($10,000 lifetime)
- Substantially equal periodic payments (Section 72(t))
- Birth or adoption (up to $5,000 per event)
Rollover and Transfer Rules
| Method | Touches the funds? | Limit |
|---|---|---|
| Direct trustee-to-trustee transfer | No | Unlimited |
| 60-day (indirect) rollover | Yes | One per 12 months across all IRAs |
| Roth conversion | Taxable, no penalty | No income limit; does not count against the one-per-year rule |
Trap: The one-rollover-per-year rule applies to indirect 60-day rollovers only. Trustee-to-trustee transfers and conversions are unlimited.
Required Minimum Distributions (RMDs)
A Required Minimum Distribution (RMD) forces money out of tax-deferred Traditional IRAs so it eventually gets taxed. Roth IRA owners have no lifetime RMDs.
| Birth Year | RMD Beginning Age |
|---|---|
| 1950 or earlier | 70 1/2 / 72 (already begun) |
| 1951-1959 | 73 |
| 1960 or later | 75 (beginning 2033) |
The annual RMD is the prior December 31 balance divided by an IRS life-expectancy factor.
Worked RMD: A 73-year-old had a $400,000 balance on the prior December 31 and an applicable factor of 26.5. The RMD is $400,000 / 26.5 = $15,094.34.
Missed-RMD Penalty
| Situation | Excise Tax |
|---|---|
| RMD not taken | 25% of the shortfall |
| Corrected within the 2-year window | Reduced to 10% |
SECURE 2.0 cut the old 50% penalty to 25%, a frequently tested update.
A 45-year-old has held a Roth IRA for 8 years. She withdraws an amount equal to only her prior regular contributions to pay for a vacation (not a qualified event). What is the tax result?
A retiree's Traditional IRA balance on the prior December 31 was $300,000 and the IRS life-expectancy factor is 25.0. What is the Required Minimum Distribution?