Retirement Accounts
Retirement accounts are the most heavily tested account type on the SIE exam. You need to know the differences between Individual Retirement Accounts (IRAs), employer-sponsored plans, and the rules governing contributions, distributions, and Required Minimum Distributions (RMDs).
Individual Retirement Accounts (IRAs)
| Feature | Traditional IRA | Roth IRA |
|---|---|---|
| Contributions | May be tax-deductible (depends on income and employer plan) | NOT tax-deductible (after-tax contributions) |
| Growth | Tax-deferred | Tax-free |
| Withdrawals | Taxed as ordinary income | Tax-free (if qualified) |
| RMDs | Required beginning at age 73 | NOT required during owner's lifetime |
| Contribution limit (2026) | $7,500 ($8,600 if age 50+) | $7,500 ($8,600 if age 50+) |
| Early withdrawal penalty | 10% penalty before age 59 1/2 (exceptions apply) | Contributions can be withdrawn anytime; earnings penalized before 59 1/2 |
| Income limits | Deductibility phases out at certain income levels | Contribution eligibility phases out at higher incomes |
2026 Deductibility & Contribution Phase-Outs (MAGI)
- Traditional IRA deduction (active participant): Single / HOH $81,000-$91,000; Married Filing Jointly (contributor active) $129,000-$149,000.
- Traditional IRA deduction (contributor NOT active, spouse IS): $242,000-$252,000.
- Traditional IRA deduction (married filing separately): $0-$10,000 when spouses lived together at any time during the year. If they lived apart the entire tax year, they may use the Single / HOH range. Above the phase-out ceiling you can still make a non-deductible contribution (tracked on Form 8606).
- Roth IRA contribution eligibility: Single / HOH $153,000-$168,000; Married Filing Jointly $242,000-$252,000; Married Filing Separately $0-$10,000 unless the spouses lived apart all year (then the Single / HOH range applies). Remember that Roth conversions have no income limit.
Qualified Roth distribution requirements:
- Account holder is at least age 59 1/2
- Account has been open for at least 5 years
- Both conditions must be met for earnings to be withdrawn tax-free
Contribution Rules
- Must have earned income to contribute to an IRA
- Spousal IRAs allow a working spouse to contribute on behalf of a non-working spouse (still requires one spouse to have earned income)
- Rollover - moving funds from one qualified plan to another:
- 60-day deadline for indirect rollovers (you receive the check and must deposit within 60 days)
- Only one indirect rollover per 12-month period
- Direct transfer (trustee-to-trustee) - no limit on frequency, not reportable as a distribution
Exam Tip: Gotchas
Indirect rollovers have a strict 60-day deadline and are limited to one per 12-month period. Direct (trustee-to-trustee) transfers have no such limits.
Employer-Sponsored Plans
| Plan Type | Key Characteristics |
|---|---|
| 401(k) | Employee salary deferrals + possible employer match; pre-tax contributions; $24,500 limit (2026), $32,500 if 50+ |
| 403(b) | Similar to 401(k) but for nonprofits, schools, and government entities |
| 457 plan | Deferred compensation for state/local government and some nonprofits; no 10% early withdrawal penalty |
| Defined benefit (pension) | Employer promises a specific retirement benefit based on salary and years of service; employer bears investment risk |
| Defined contribution | Employer and/or employee contribute; benefit depends on investment performance; employee bears investment risk |
Exam Tip: Gotchas
457 plans have NO 10% early withdrawal penalty. They are the only employer-sponsored plan with this exception.
Defined Benefit vs. Defined Contribution
| Feature | Defined Benefit | Defined Contribution |
|---|---|---|
| Promise | Specific retirement income | No guaranteed outcome |
| Investment risk | Employer bears the risk | Employee bears the risk |
| Benefit calculation | Based on salary, years of service, and a formula | Based on contributions and investment performance |
| Example | Traditional pension | 401(k), 403(b) |
Exam Tip: Gotchas
Defined benefit = EMPLOYER bears the investment risk. Defined contribution = EMPLOYEE bears the risk. The exam loves testing which party carries the risk.
Required Minimum Distributions (RMDs)
- Must begin by April 1 of the year following the year the account owner turns 73
- Applies to: Traditional IRAs, 401(k)s, 403(b)s, and other qualified plans
- Does NOT apply to Roth IRAs during the owner's lifetime
- Failure to take RMDs results in a 25% excise tax on the amount not distributed
Exam Tip: Gotchas
The RMD penalty was reduced from 50% to 25%; expect the exam to test the current 25% figure. Roth IRAs have NO RMDs during the owner's lifetime, while Traditional IRAs require them starting at age 73.