11.3 Individual Retirement Accounts (IRAs)

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

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

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):

Single: Full Deduction MAGI less than $81,000; Partial Deduction $81,000 - $91,000; No Deduction greater than $91,000

Married Filing Jointly: Full Deduction MAGI less than $129,000; Partial Deduction $129,000 - $149,000; No Deduction greater than $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 59 1/2 (exceptions apply)

- Earnings taxable: All distributions taxed as ordinary income

Roth IRA

Tax Treatment

Contributions: NOT deductible (after-tax dollars)

Growth: Tax-FREE

Qualified Distributions: TAX-FREE

Income Limits (2026)

Single: Full Contribution MAGI less than $153,000; Partial Contribution $153,000 - $168,000; No Contribution greater than $168,000

Married Filing Jointly: Full Contribution MAGI less than $242,000; Partial Contribution $242,000 - $252,000; No Contribution greater than $252,000

Qualified Distribution Requirements

A distribution is tax-free if BOTH conditions are met:

1. 5-Year Rule: Account has been open for at least 5 years

2. Qualifying Event:

- Age 59 1/2 or older

- Death

- Disability

- First-time home purchase (up to $10,000 lifetime)

Key Advantages

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

Contribution: Traditional IRA - Pre-tax (if deductible); Roth IRA - After-tax

Growth: Traditional IRA - Tax-deferred; Roth IRA - Tax-free

Distributions: Traditional IRA - Taxed as ordinary income; Roth IRA - Tax-free (if qualified)

Income Limits for Contribution: Traditional IRA - None (deductibility limited); Roth IRA - Yes ($153K/$242K phase-out begins)

RMDs: Traditional IRA - Required at age 73; Roth IRA - None during lifetime

Early Withdrawal: Traditional IRA - Penalty on all; Roth IRA - Contributions penalty-free

Best If: Traditional IRA - Tax rate higher now than in retirement; Roth IRA - 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:

1. Contribute to non-deductible Traditional IRA

2. Convert to Roth IRA

3. 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

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

For: Employers with 100 or fewer 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

1. 2026 IRA limit: $7,500 ($8,600 if 50+) - combined for all IRAs

2. Traditional: tax-deductible contributions, taxable distributions

3. Roth: after-tax contributions, tax-free qualified distributions

4. Roth income phase-outs begin at $153K single / $242K MFJ (2026)

5. Roth has NO RMDs during owner's lifetime

6. Roth contributions (not earnings) can be withdrawn anytime tax/penalty-free