11.3 Individual Retirement Accounts (IRAs)
Key Takeaways
IRA contribution limit is $7,500 ($8,600 if age 50+) for 2026, combined across IRAs.
Traditional IRA contributions may be deductible; distributions are taxable.
Roth IRA contributions are after-tax; qualified distributions are tax-free.
Roth income phase-outs begin at $153K single / $242K MFJ for 2026.
Roth IRAs have no RMDs during the owner's lifetime.
Roth contributions can be withdrawn anytime without tax or penalty.
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.
2026 IRA Contribution Limits
| Age | Annual Limit |
|---|---|
| Under 50 | $7,500 |
| 50 and older | $8,600 ($7,500 + $1,100 catch-up) |
Important: This is the COMBINED limit for Traditional AND Roth IRAs (not each).
Traditional IRA
Tax Treatment
| Phase | Tax Treatment |
|---|---|
| Contributions | May be tax-deductible (reduces taxable income) |
| Growth | Tax-deferred (no annual tax) |
| Distributions | Taxed as ordinary income |
Deductibility Rules
If NOT covered by employer retirement plan: Full deduction regardless of income
If covered by employer plan (2026 phase-outs):
| Filing Status | Full Deduction | Partial Deduction | No Deduction |
|---|---|---|---|
| Single | MAGI < $81,000 | $81,000 - $91,000 | > $91,000 |
| Married Filing Jointly | MAGI < $129,000 | $129,000 - $149,000 | > $149,000 |
If spouse is covered (but you are not):
- Phase-out: $242,000 - $252,000 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
| Phase | Tax Treatment |
|---|---|
| Contributions | NOT deductible (after-tax dollars) |
| Growth | Tax-FREE |
| Qualified Distributions | TAX-FREE |
Income Limits (2026)
| Filing Status | Full Contribution | Partial Contribution | No Contribution |
|---|---|---|---|
| Single | MAGI < $153,000 | $153,000 - $168,000 | > $168,000 |
| Married Filing Jointly | MAGI < $242,000 | $242,000 - $252,000 | > $252,000 |
Qualified Distribution Requirements
A distribution is tax-free if BOTH conditions are met:
- 5-Year Rule: Account has been open for at least 5 years
- Qualifying Event:
- Age 59½ or older
- Death
- Disability
- First-time home purchase (up to $10,000 lifetime)
Key Advantages
| Feature | Roth IRA Advantage |
|---|---|
| RMDs | NONE during owner's lifetime |
| Contributions | Can withdraw anytime, tax and penalty-free |
| Tax Diversification | Hedge against future tax rate increases |
| Estate Planning | Tax-free growth continues for beneficiaries |
Traditional vs. Roth IRA Comparison
| Feature | Traditional IRA | Roth IRA |
|---|---|---|
| Contribution | Pre-tax (if deductible) | After-tax |
| Growth | Tax-deferred | Tax-free |
| Distributions | Taxed as ordinary income | Tax-free (if qualified) |
| Income Limits for Contribution | None (deductibility limited) | Yes ($153K/$242K phase-out begins) |
| RMDs | Required at age 73 | None during lifetime |
| Early Withdrawal | Penalty on all | Contributions penalty-free |
| Best If | Tax rate higher now than in retirement | Tax rate lower now than in retirement |
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:
- Contribute to non-deductible Traditional IRA
- Convert to Roth IRA
- 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
| Feature | Description |
|---|---|
| For | Self-employed and small business owners |
| Contributions | Employer only |
| 2026 Limit | 25% of compensation, up to $72,000 |
| Administration | Simple, low cost |
SIMPLE IRA
| Feature | Description |
|---|---|
| For | Employers with ≤100 employees |
| 2026 Employee Limit | $17,000 ($21,000 if 50+) |
| Employer Requirement | Match up to 3% OR 2% non-elective |
| Early Withdrawal | 25% penalty if within first 2 years |
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
- 2026 IRA limit: $7,500 ($8,600 if 50+)—combined for all IRAs
- Traditional: tax-deductible contributions, taxable distributions
- Roth: after-tax contributions, tax-free qualified distributions
- Roth income phase-outs begin at $153K single / $242K MFJ (2026)
- Roth has NO RMDs during owner's lifetime
- Roth contributions (not earnings) can be withdrawn anytime tax/penalty-free
A qualified distribution from a Roth IRA requires the account to be open for at least:
1 year
3 years
5 years
10 years
Which type of IRA does NOT require RMDs during the owner's lifetime?
Traditional IRA
SEP IRA
SIMPLE IRA
Roth IRA
In 2026, a married couple filing jointly with MAGI of $260,000 who wants to contribute to a Roth IRA:
Can make a full contribution
Can make a partial contribution (in the phase-out range)
Cannot contribute directly but can use backdoor Roth strategy
Is prohibited from any Roth contributions, including conversions
Sections you finish are checked off in the contents.