Retirement Plans and Other Tax-Advantaged Accounts
Quick Answer
Individual retirement accounts (IRAs) and small-employer plans are the foundation of retirement savings. Traditional IRAs offer pre-tax contributions with taxable distributions, Roth IRAs offer after-tax contributions with tax-free qualified distributions, and SEP and SIMPLE IRAs extend IRA-style accounts to small employers. The 10% early-withdrawal penalty applies before age 59-1/2 with narrow exceptions.
With the basics of account setup covered, the rest of this unit focuses on the account types the exam tests most heavily: retirement plans. Start with individual retirement accounts (IRAs), because they are the foundation for the small-employer plans (SEPs and SIMPLEs) that follow.
How do Traditional and Roth IRAs differ?
| Feature | Traditional IRA | Roth IRA |
|---|---|---|
| Contributions | Pre-tax (deductible, subject to income limits if covered by a workplace plan) | After-tax (never deductible) |
| 2025 contribution limit (under 50) | $7,000 | $7,000 |
| 2025 catch-up (age 50+) | +$1,000 ($8,000 total) | +$1,000 ($8,000 total) |
| Growth | Tax-deferred | Tax-free (if qualified) |
| Qualified distributions | Taxed as ordinary income | Tax-free if age 59-1/2 AND 5-year account aging rule met |
| 2025 phase-out (single) | Deduction phase-out depends on workplace-plan coverage | Contribution phase-out $150,000-$165,000 modified adjusted gross income (MAGI) |
| 2025 phase-out (married filing jointly) | Deduction phase-out depends on workplace-plan coverage | Contribution phase-out $236,000-$246,000 MAGI |
| Required Minimum Distributions (RMDs) | Must begin by April 1 following the year the owner reaches age 73 | No RMDs during the owner's lifetime |
| Contribution cutoff age | No age limit (SECURE Act removed the former 70-1/2 cap) | No age limit (must have earned income) |
Additional IRA rules:
- IRA contributions are limited to the lesser of the annual dollar limit or 100% of earned income
- A non-working spouse may contribute via a spousal IRA if the working spouse has sufficient earned income and a joint return is filed
- Contributions for a tax year may be made up to the tax filing deadline (generally April 15 of the following year), without extensions
When does the 10% early IRA distribution penalty apply?
Distributions from a Traditional or Roth IRA before age 59-1/2 are generally subject to a 10% federal penalty on top of ordinary income tax on the taxable portion.
Common exceptions (no 10% penalty, but tax may still apply):
- Death or disability of the account owner
- First-time home purchase (up to $10,000 lifetime)
- Qualified higher-education expenses
- Substantially Equal Periodic Payments (SEPP) under IRS Rule 72(t)
- Medical expenses above the adjusted gross income (AGI) threshold
- Health insurance premiums while unemployed (after specified conditions)
- Qualified birth or adoption expenses (up to $5,000)
Roth IRA contributions (not earnings) can be withdrawn at any time tax-free and penalty-free. Only earnings are subject to tax and the 10% penalty if withdrawn before 59-1/2 outside of the exceptions.
Exam Tip: Gotchas
- Roth IRA contributions come out tax-free and penalty-free at any age. The 10% penalty and the 5-year rule apply only to earnings. Questions about "a 40-year-old Roth owner who needs cash" test whether you know the contribution layer comes out first.
How do SEP IRA and SIMPLE IRA plans work?
| Plan | Who Sponsors | Who Contributes | 2025 Limits |
|---|---|---|---|
| SEP IRA | Employer (including self-employed) | Employer only (contributions go to each employee's IRA) | Lesser of 25% of compensation or $70,000 |
| SIMPLE IRA | Employer with 100 or fewer employees | Both employer and employee; employer must either match up to 3% or make a 2% non-elective contribution | Employee elective deferral: $16,500; catch-up age 50+: $3,500 |
Key differences:
- SEP: Easy to set up, employer-funded only, employee is immediately 100% vested in employer contributions; permissible investments include mutual funds, variable annuities, and other IRA-eligible securities
- SIMPLE: Alternative for small employers who find 401(k) administration burdensome; employee elective deferrals vest immediately
Exam Tip: Gotchas
- SEP = Simplified Employee Pension; only the employer contributes (not the employee). SIMPLE (Savings Incentive Match Plan for Employees) permits both employer and employee contributions. A question asking about employee elective deferrals in a SEP is testing a trick: SEP does not allow employee deferrals.
What is a Keogh (HR-10) retirement plan?
- Retirement plan for self-employed individuals (sole proprietors) and unincorporated businesses (partnerships)
- May be set up as a defined contribution or defined benefit plan
- Historically popular before SEP IRA simplification; largely replaced by SEPs due to administrative complexity
- Contributions are pre-tax and grow tax-deferred; distributions taxed as ordinary income
- The term "Keogh" comes from the 1962 law that allowed unincorporated businesses to sponsor qualified plans
At what age do Required Minimum Distributions begin under SECURE 2.0?
The RMD starting age changed under the SECURE 2.0 Act:
- Age 73: For those reaching age 72 after 12/31/2022 and reaching 73 before 1/1/2033
- Age 75: For those reaching age 73 after 12/31/2032
- Roth IRAs have no lifetime RMD for the owner
Exam Tip: Gotchas
- The RMD starting age is 73 for most current exam-takers' clients. A question asking when the owner of a Traditional IRA must take a first RMD is testing age 73 and the April 1 of the following year deadline. Roth owners never take an RMD during their lifetime.