Individual Retirement Accounts (Traditional and Roth)

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.

Contribution Limits (2026)

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

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.

Traditional IRA

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
• All distributions taxed as ordinary income
• Anyone with earned income can contribute, regardless of income level (deductibility may be limited)

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

• If NEITHER spouse is covered by an employer retirement plan, the contribution is FULLY deductible at ANY income level
• Above the upper limit: no deduction, but a non-deductible contribution is still allowed
• For married filing separately taxpayers who did not live with their spouse at any point during the year, use the Single / HOH phase-out range instead of the $0 - $10,000 band.

Exam Tip: Gotchas

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

Roth IRA

Tax treatment:

• Contributions are NOT deductible (after-tax dollars only)
• Earnings grow tax-free
• Qualified distributions are completely tax-free
• Qualified distribution requires: (1) account open 5+ years AND (2) age 59.5+, death, disability, or first-time home purchase ($10,000 lifetime limit)
• Contributions (not earnings) can be withdrawn at any time tax-free and penalty-free (Roth contributions come out first under ordering rules)

2026 income phase-out ranges (contribution eligibility):

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.

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

Roth Conversion

• Any taxpayer can convert a Traditional IRA to Roth regardless of income level ("backdoor Roth" strategy)
• Converted amount is taxable as ordinary income in the year of conversion
• No income limit on conversions

Exam Tip: Gotchas

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

Early Withdrawal Penalties and Exceptions

Distributions from Traditional IRAs before age 59.5 are subject to a 10% additional tax (plus ordinary income tax). For Roth IRAs, the penalty applies only to earnings withdrawn before 59.5 (contributions always come out first, tax- and penalty-free).

Exceptions to the 10% Early Withdrawal Penalty (IRA-specific)

• Death of the IRA owner (beneficiary distributions)
• Disability (total and permanent)
• Substantially equal periodic payments (SEPP / 72(t)) - must continue for 5 years or until age 59.5, whichever is longer
• 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)
• Health insurance premiums while unemployed (after receiving unemployment for 12+ consecutive weeks)
• IRS levy on the IRA
• Qualified birth or adoption (up to $5,000 per event, per SECURE Act)

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.

Required Minimum Distributions (RMDs)

• 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, per SECURE Act 2.0)
• Failure to take RMD: penalty of 25% of the amount not distributed (reduced from 50% by SECURE Act 2.0)
• 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)

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.

Rollovers and Transfers

• Direct rollover (trustee-to-trustee): Funds move directly between plan custodians; no withholding, no tax consequences
• 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)

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.

Traditional vs Roth IRA Comparison

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.