Quick Answer
Traditional individual retirement account (IRA) contributions may be deductible and grow tax-deferred, taxed as ordinary income at distribution. Roth IRA contributions are after-tax and qualified distributions are tax-free with no lifetime required minimum distributions (RMDs). Employer plans include 401(k), 403(b), SEP, and SIMPLE. Early withdrawals before age 59.5 face a 10% penalty.
The whole unit on one sheet: IRAs, employer plans, contribution limits, distributions, penalties, and the rollover mechanics the exam loves.
The One-Liners That Win Points
- Traditional IRA: contributions may be deductible (pre-tax), growth is tax-deferred, all distributions taxed as ordinary income.
- Roth IRA: contributions are after-tax, growth is tax-free, qualified distributions are completely tax-free. Contributions (not earnings) can be withdrawn anytime tax- and penalty-free.
- Traditional IRAs have deduction phaseouts (anyone can contribute, deductibility phases out). Roth IRAs have contribution phaseouts (high earners cannot contribute at all).
- Anyone can convert a Traditional IRA to Roth regardless of income ("backdoor Roth"); the converted amount is taxable as ordinary income in the year of conversion. Income limits apply to Roth contributions, not conversions.
- Defined benefit plan: employer bears investment risk, insured by the Pension Benefit Guaranty Corporation (PBGC). Defined contribution plan: employee bears investment risk, no PBGC.
- SEP IRA (simplified employee pension): employer-only contributions, no employee deferrals, no catch-up.
- SIMPLE IRA (savings incentive match plan for employees): both employer and employee contribute; higher 25% early-withdrawal penalty in the first 2 years.
- 457(b) plan: no 10% early-withdrawal penalty at any age (unique among retirement plans).
- 403(b) plan adds a 15-year service catch-up that 401(k) does not.
- Nonqualified plan assets are the employer's general assets, exposed to creditors in bankruptcy; not portable, no rollover.
Numbers to Lock In
| Item | Value |
|---|---|
| IRA contribution limit (under 50) | $7,500 |
| IRA contribution limit (50 or older) | $8,600 (includes $1,100 catch-up) |
| Early-withdrawal penalty age | before 59.5 = 10% additional tax |
| First-time home purchase exception | $10,000 lifetime (IRAs only) |
| Qualified birth or adoption exception | up to $5,000 per event |
| Roth qualified distribution rule | account open 5+ years AND age 59.5+ (or death, disability, first home) |
| RMD start age | April 1 of year after turning 73 (born 1951-1959); 75 if born 1960 or later |
| Missed-RMD penalty | 25% of shortfall (10% if corrected within 2 years) |
| Indirect rollover deadline | 60 days |
| Indirect employer-plan rollover withholding | 20% mandatory federal |
| One-per-year rollover rule | one indirect IRA-to-IRA rollover per 12 months |
| 401(k) / 403(b) / 457(b) deferral (under 50) | $24,500 |
| Defined benefit max annual benefit | $290,000 or 100% of highest 3-year average pay |
| Defined contribution combined max | $72,000 (excluding catch-up) |
| SIMPLE IRA deferral | $17,000 (under 50) / $21,000 (50+, $4,000 catch-up); enhanced $18,100 / $22,100 |
| SIMPLE IRA employer contribution | 3% dollar-for-dollar match OR 2% nonelective |
| SIMPLE IRA first-2-years penalty | 25% (then standard 10%) |
| SEP IRA limit | 25% of compensation, up to $72,000 |
| Catch-up (ages 50-59) | $8,000 |
| Super catch-up (ages 60-63) | $11,250 |
| Catch-up (age 64+) | $8,000 (reverts to standard) |
| Roth catch-up mandate trigger | over $150,000 in prior-year FICA wages |
Top Gotchas
- Delaying the first RMD to April 1 of the following year means TWO taxable distributions in one year, which can push the owner into a higher bracket.
- RMDs cannot be rolled over by any method. Only the portion of a distribution exceeding the RMD qualifies for rollover treatment.
- The 20% mandatory withholding applies to indirect rollovers from employer plans. To complete the rollover the owner must deposit the FULL amount (including the withheld 20%) within 60 days, adding the shortfall from personal funds; a direct trustee-to-trustee rollover avoids this entirely.
- Roth IRA owners are never subject to RMDs during their lifetime. Roth accounts inside employer plans (Roth 401(k)/403(b)/governmental 457(b)) no longer require RMDs either.
- For Roth IRAs the 10% penalty applies only to earnings withdrawn before 59.5; contributions always come out first, tax- and penalty-free.
- SIMPLE IRAs carry a 25% early-withdrawal penalty in the first 2 years of participation, not the usual 10%.
- 457(b) plans impose no 10% early-withdrawal penalty regardless of age; 401(k) and 403(b) still do before 59.5.
- A rabbi trust does NOT protect against employer bankruptcy; those assets stay available to the company's general creditors.
One-Breath Recap
A Traditional individual retirement account (IRA) gives a possible upfront deduction, tax-deferred growth, and ordinary-income taxation at distribution, while a Roth IRA is funded with after-tax dollars, grows tax-free, and pays qualified distributions tax-free with no lifetime required minimum distributions (RMDs). Employer plans span 401(k), 403(b), 457(b), SEP, and SIMPLE, where defined benefit shifts investment risk to the employer and defined contribution shifts it to the employee. Lock in the shared IRA limit of $7,500 (or $8,600 at 50 and older), the 10% penalty before age 59.5, the age 73/75 RMD start, and the 60-day indirect-rollover window with its 20% employer-plan withholding, and this heavily tested unit answers itself.
Need more than the recap? This is a condensed summary. If it is not enough, read the full Retirement Plans unit for the complete lesson.