Individual Retirement Accounts

Quick Answer

Traditional and Roth IRAs share a combined $7,500 contribution limit ($8,600 at 50+), but tax treatment differs: Traditional contributions may be deductible with tax-deferred growth and ordinary-income distributions, while Roth contributions are after-tax with tax-free qualified distributions and no lifetime RMDs. Early withdrawals before 59.5 generally trigger a 10% penalty.

IRAs are the foundation of individual retirement savings. Understanding their contribution limits, tax treatment, distribution rules, and rollover mechanics is essential for the Series 65 exam.

What Are the 2026 IRA Contribution Limits?

Both Traditional and Roth IRA contributions share a single combined limit:

Under 50: $7,500

50 or older: $8,600 (includes a $1,100 catch-up)

The limit applies across ALL IRAs combined; you cannot contribute $7,500 to each

Contributions cannot exceed the taxpayer's earned income for the year

Under the Internal Revenue Code, contributions for a given tax year may be made until that year's tax-filing deadline (typically April 15 of the following year); this deadline is NOT extended by a filing extension

What Happens If Someone Contributes Too Much?

An excess contribution carries a 6% excise tax, charged for every year the excess stays in the account, not once

The tax is capped at 6% of the account's value at year end, and the account owner pays it, not the custodian

Correcting the excess stops the clock. Withdrawing the excess (along with any earnings on it) before the tax-filing deadline for that year avoids the penalty entirely

An excess left in place is taxed again each year, so a small mistake compounds quietly

Exam Tip: Gotchas

The 6% excise tax is annual, not one-time. This is the tested distinction. An excess contribution left alone for four years is taxed four times, and it keeps being taxed until the excess is removed or absorbed by a later year's unused contribution room.

What Is a Spousal IRA?

If one spouse has little or no earned income, the working spouse can fund a spousal IRA as long as they file a joint tax return and combined income covers both contributions.

How Does a Traditional IRA Work?

Tax treatment:

Contributions may be tax-deductible (pre-tax) or non-deductible (after-tax) depending on income and whether covered by a workplace plan

Earnings grow tax-deferred

Distributions are taxed as ordinary income, to the extent they represent deductible contributions and growth. The portion of a distribution that returns already-taxed, non-deductible contributions (basis) is not taxed again.

Anyone with earned income can contribute, regardless of income level (deductibility may be limited)

2026 deductibility phase-out ranges (Modified Adjusted Gross Income (MAGI)):

Single / Head of Household (HOH), Covered by Employer Plan? Yes: Full Deduction $81,000 or less; Phaseout Range $81,000 - $91,000; No Deduction Above $91,000

Married Filing Jointly (MFJ), Contributor covered: Full Deduction $129,000 or less; Phaseout Range $129,000 - $149,000; No Deduction Above $149,000

MFJ, Contributor NOT covered, spouse IS: Full Deduction $242,000 or less; Phaseout Range $242,000 - $252,000; No Deduction Above $252,000

MFJ or MFS, Neither spouse covered: Full deduction at any income; Phaseout N/A; No Deduction N/A

Married Filing Separately (MFS), Covered by employer plan (or spouse is): Full Deduction N/A; Phaseout Range $0 - $10,000; No Deduction Above $10,000

If NEITHER spouse is covered by an employer retirement plan, the contribution is FULLY deductible at ANY income level, regardless of filing status (this includes MFS, not just MFJ)

Above the upper limit: no deduction, but a non-deductible contribution is still allowed

"Covered by an employer plan" and "active participant" mean the same thing here. The Internal Revenue Code counts an active participant in a qualified plan (such as a 401(k)), a 403(b) annuity, a government plan, a SEP, or a SIMPLE IRA. Vesting does not matter. A 457(b) deferred compensation plan does not count.

Exam Tip: Gotchas

The phaseout only applies when the contributor (or their spouse) is covered by an employer plan (is an active participant). A nondeductible contribution is still allowed; it just does not reduce taxable income.

Filing jointly does not put both spouses in one range. Each spouse is tested on their own coverage, so the range follows the person making the IRA contribution.

One joint return can carry two different ranges. If only the husband has a 401(k), his deduction phases out at $129,000 - $149,000. His wife's phases out at $242,000 - $252,000.

An MFS filer covered by a workplace plan (or whose spouse is) faces a $0-$10,000 MAGI phaseout under the Internal Revenue Code, which eliminates the deduction for nearly all such filers. The exception: if the spouses lived apart for the entire year, the Code treats them as unmarried for this purpose, and the ordinary Single/HOH phaseout range applies instead.

How Does a Roth IRA Work?

Tax treatment:

Contributions are NOT deductible (after-tax dollars only)

Earnings grow tax-free

Qualified distributions are completely tax-free

Qualified distribution requires: (1) the 5-year period met (counted from the first-ever Roth contribution, see below) AND (2) age 59.5+, death, disability, or first-time home purchase ($10,000 lifetime limit)

The 5-year clock is per individual, not per account. Under the Internal Revenue Code, it begins January 1 of the tax year of the person's first-ever contribution to ANY Roth IRA. Opening a new or additional Roth IRA later does not start a new clock or reset the existing one; the original start date governs every Roth IRA the person owns.

Contributions (not earnings) can be withdrawn at any time tax-free and penalty-free (Roth contributions come out first under ordering rules)

Worked example: an owner has put in $30,000 directly, and the account is worth $45,000. A $30,000 withdrawal is all contributions, so it is tax-free and penalty-free at any age. Only a withdrawal above $30,000 reaches the $15,000 of earnings, and that part is taxable unless the distribution is qualified, and before 59.5 it usually draws the 10% penalty

2026 income phase-out ranges (contribution eligibility):

Single / HOH: Full Contribution Below $153,000; Phaseout Range $153,000 - $168,000; No Contribution $168,000 or more

MFJ: Full Contribution Below $242,000; Phaseout Range $242,000 - $252,000; No Contribution $252,000 or more

MFS: Full Contribution N/A; Phaseout Range $0 - $10,000; No Contribution $10,000 or more

Every range above is adjusted for inflation each year except the married-filing-separately range, which the Internal Revenue Code fixes at $0 to $10,000 and never indexes. The same is true of the MFS range for the Traditional IRA deduction

Exam Tip: Gotchas

Traditional IRAs have deduction phaseouts (anyone can contribute, but deductibility phases out). Roth IRAs have contribution phaseouts (high earners cannot contribute at all). This distinction is heavily tested.

Qualified-distribution conditions decide the tax on earnings, not on regular contributions. A 45-year-old can take back regular Roth contributions at any time with no tax and no 10% penalty. Those dollars were already taxed, and the ordering rules treat every withdrawal as coming from contributions first.

No Required Minimum Distributions (RMDs) during owner's lifetime: Roth IRA owner is never subject to RMDs, making it a powerful estate planning tool.

What Is a Roth Conversion?

A Traditional IRA can be converted to Roth regardless of income level

The pre-tax portion of the converted amount is taxable as ordinary income in the year of conversion; nondeductible contributions (basis) are not taxed again

No income limit on conversions

Each conversion has its own 5-year penalty period, which begins January 1 of the conversion year

An owner under 59.5 who withdraws converted money inside that period owes the 10% additional tax on the part that was taxable at conversion, unless another exception applies. Basis that moved over untaxed carries no penalty

A SEP IRA balance can also be converted. Its pre-tax employer allocations and earnings are taxable at conversion. If the account permits it, the owner may separately make regular personal IRA contributions; nondeductible contributions are basis and are not taxed again at conversion. The backdoor Roth route uses a nondeductible personal contribution followed by conversion

Exam Tip: Gotchas

Income limits apply to Roth contributions, not conversions. Anyone can convert regardless of income.

Each Roth conversion starts its own separate 5-year clock for the 10% early-distribution penalty on the converted amount. It is separate from the per-person 5-year clock that decides whether earnings come out tax-free. Withdrawing the taxable part of converted funds inside that period, before age 59.5 and absent another exception, can trigger the 10% penalty even though income tax was already paid.

What Are the Early Withdrawal Penalties and Exceptions?

Distributions from Traditional IRAs before age 59.5 generally face a 10% additional tax plus ordinary income tax. Roth early nonqualified earnings and taxable converted amounts withdrawn within their separate five-taxable-year period before 59.5 can face the penalty unless an exception applies. Regular Roth contributions come out first, tax- and penalty-free.

What Exceptions Apply to the 10% Early Withdrawal Penalty?

Death of the IRA owner (beneficiary distributions)

Disability (total and permanent)

Substantially equal periodic payments (SEPP): must continue for 5 years or until age 59.5, whichever is longer. If the schedule is modified before then for any reason other than death or disability, the Internal Revenue Code retroactively applies the 10% penalty (plus interest) to every distribution already taken under the schedule, assessed in the year of the modification.

First-time home purchase (lifetime limit of $10,000)

Qualified higher education expenses (tuition, fees, books, room and board if at least half-time)

Unreimbursed medical expenses exceeding a specified percentage of Adjusted Gross Income (AGI)

Qualified reservist distributions to a member called to active duty for more than 179 days

Health insurance premiums, after receiving unemployment compensation for 12+ consecutive weeks

IRS levy on the IRA

Qualified birth or adoption (up to $5,000 per event)

Exam Tip: Gotchas

First-time home purchase exception is limited to $10,000 LIFETIME and applies to IRAs only (not employer plans like 401(k)). "First-time" means the individual has not owned a home in the prior 2 years.

The education expense exception also applies to IRAs only, not to employer-sponsored plans.

The health insurance exception turns on RECEIVING unemployment compensation for 12+ consecutive weeks, not on being unemployed for 12+ weeks. Someone jobless for 12+ weeks who never collected benefits for that stretch does not qualify. Once qualified, distributions can be taken in the year the compensation was received or the following year, and the exception ends once the individual has been reemployed for 60+ days.

A SEPP schedule must continue for 5 years or until age 59.5, whichever is longer. This duration requirement is frequently tested. Breaking the schedule early (other than for death or disability) does not just end the exception going forward: the Internal Revenue Code retroactively taxes ALL prior SEPP distributions at the 10% penalty rate, plus interest, in the year the schedule is modified.

When Must RMDs Begin?

Must begin by April 1 of the year following the year the owner turns 73 (born 1951-1959)

Increases to age 75 for those born in 1960 or later (effective 2033)

Failure to take the full RMD by its applicable deadline can trigger a 25% excise tax on the shortfall (reduced from the prior 50% rate)

Penalty further reduced to 10% if corrected within 2 years

If first RMD is delayed to April 1 of the following year, the owner must take two distributions that year (first year's RMD + current year's RMD)

Example: an owner who turns 73 in 2026 may take the 2026 RMD as late as April 1, 2027. The 2027 RMD is still due during 2027, so both distributions land on the 2027 tax return.

April 1 is the permitted deadline for the first RMD, so using it triggers no penalty. The delay does not cancel or reduce the first RMD, and each distribution is taxed in the year the owner receives it.

Exam Tip: Gotchas

Delaying the first RMD to April 1 of the following year means TWO taxable distributions in one year. This can push the owner into a higher tax bracket. The exam may test whether this strategy is advisable.

A delay moves the 2026 RMD into 2027; it never forfeits it and it never earns a penalty. The 25% excise tax applies only to an amount not taken by its deadline, which for the first RMD is April 1 of the following year.

How Do Inherited IRA Distributions Work?

A designated beneficiary who is not an eligible designated beneficiary generally must empty an inherited IRA by the end of the tenth year after the owner's death. That deadline does not always replace annual distributions:

Owner's death Before the required beginning date: Years 1 through 9 Generally no annual distribution required; End of year 10 Empty the account

Owner's death On or after the required beginning date: Years 1 through 9 Annual required distributions generally continue; End of year 10 Empty the account

An inherited Roth IRA follows the first row because its owner had no lifetime required beginning date. Eligible designated beneficiaries, including a surviving spouse, have separate payout options.

How Do IRA Rollovers and Transfers Work?

Direct rollover (trustee-to-trustee): Funds move directly between plan custodians; no withholding, no tax consequences (except SIMPLE IRA money in its first 2 years, which moves tax-free only to another SIMPLE IRA)

Indirect rollover: Distribution paid to the account owner, who has 60 days to deposit into another qualified account

Payer must withhold 20% mandatory federal tax on indirect rollovers from employer plans

Owner must deposit the full amount (including the withheld 20%) within 60 days to avoid tax and penalties

One-per-year rule: Only one indirect IRA-to-IRA rollover permitted per 12-month period (does not apply to direct rollovers or Roth conversions)

RMDs are never eligible for rollover. Under the Internal Revenue Code, the portion of a distribution that represents the current year's required minimum distribution cannot be rolled over, whether by direct transfer or indirect (60-day) rollover. That amount must be taken as a taxable distribution; only the amount distributed above the RMD is eligible for rollover treatment.

Exam Tip: Gotchas

The 20% mandatory withholding applies to INDIRECT rollovers from employer plans (401(k) to IRA). If an employee receives a $100,000 distribution, only $80,000 is paid out. To complete the rollover, the employee must deposit $100,000 within 60 days (adding $20,000 from personal funds). The $20,000 withheld is recovered when filing taxes. Direct (trustee-to-trustee) rollovers avoid this entirely.

An RMD cannot be rolled over, regardless of the transfer method used. Neither the 60-day window nor a direct trustee-to-trustee transfer can shelter the RMD portion of a distribution from taxation.

How Do Traditional and Roth IRAs Compare?

Contribution limit (2026): Traditional IRA $7,500 ($8,600 age 50+); Roth IRA $7,500 ($8,600 age 50+)

Tax deduction on contribution: Traditional IRA Yes (if eligible); Roth IRA No

Tax on growth: Traditional IRA Tax-deferred; Roth IRA Tax-free (if qualified)

Tax on distribution: Traditional IRA Ordinary income; Roth IRA Tax-free (if qualified)

Income limit to contribute: Traditional IRA None (deductibility limited); Roth IRA Yes (phaseout applies)

RMDs during owner's lifetime: Traditional IRA Yes (age 73/75); Roth IRA No

5-year rule: Traditional IRA No; Roth IRA Yes (for qualified distribution)

Early withdrawal penalty: Traditional IRA Generally 10% before age 59.5; Roth IRA 10% on early nonqualified earnings and taxable converted amounts inside their separate 5-year period before 59.5, absent an exception; regular contributions are penalty-free

Exam Tip: Gotchas

Traditional IRA: anyone can contribute regardless of income. Deductibility is what is income-limited. Roth IRA: above the income limit, contribution is barred entirely.

What Should You Check on Exam Day?

The $7,500 (under 50) / $8,600 (50+) contribution limit is combined across all Traditional and Roth IRAs, not per account

Traditional IRAs have deduction phaseouts; Roth IRAs have contribution phaseouts

A Roth qualified distribution needs the 5-year period met (one clock per individual, starting with the first-ever Roth contribution, not reset by a new Roth IRA) AND age 59.5+, death, disability, or a first-time home purchase (up to $10,000)

Roth IRA owners have no lifetime RMDs; Traditional IRA RMDs start by April 1 after turning 73 (75 for those born 1960+)

Indirect rollovers must be completed within 60 days, with 20% mandatory withholding on employer-plan distributions; only one indirect IRA-to-IRA rollover is allowed per 12-month period