SERIES 7 | SERIES 63 | SERIES 65 | FINANCIAL REGULATION COURSES
An Individual Retirement Account is a personal tax-advantaged savings vehicle established under the Internal Revenue Code that allows individuals with earned income to set aside funds for retirement, with the tax treatment of contributions and distributions varying by account type — traditional IRAs providing a potential upfront tax deduction on contributions with fully taxable distributions, and Roth IRAs providing no upfront deduction but fully tax-free qualified distributions. IRAs are among the most widely held retirement savings accounts in the United States, governed primarily by IRC Section 408 for traditional IRAs and IRC Section 408A for Roth IRAs, and they appear throughout the SIE, Series 7, and Series 65 examination curricula in the context of retirement accounts, taxation, and customer suitability.
The Two Primary IRA Types — Traditional and Roth
The traditional IRA and the Roth IRA are the two standard forms of individual retirement account, and the central examination skill is understanding how they differ across five dimensions: contribution deductibility, income limits, distribution taxation, required minimum distributions, and the age at which contributions may be made.
Traditional IRA — The Pre-Tax Vehicle
A traditional IRA, governed by IRC Section 408, allows eligible individuals to contribute up to the annual limit in pre-tax or after-tax dollars depending on the contributor's income and whether they or their spouse are covered by a retirement plan at work.
Contributions made on a pre-tax basis — deductible contributions — reduce the contributor's adjusted gross income in the year of contribution, providing an immediate tax benefit. Earnings within the account grow on a tax-deferred basis — no tax is owed on dividends, interest, or capital gains while they remain in the account. All distributions, including the return of deductible contributions and all accumulated earnings, are taxed as ordinary income in the year received.
The deductibility of traditional IRA contributions depends on three factors: whether the contributor is an active participant in an employer-sponsored retirement plan such as a 401(k), whether the contributor's spouse is an active participant, and the contributor's modified adjusted gross income.
For 2025, a single taxpayer who is an active participant in an employer plan may deduct the full contribution if their modified AGI is below seventy-nine thousand dollars. The deduction phases out between seventy-nine thousand and eighty-nine thousand dollars and is eliminated entirely above eighty-nine thousand dollars. For married filing jointly taxpayers where the contributing spouse is an active participant, the phase-out range is one hundred and twenty-six thousand to one hundred and forty-six thousand dollars for 2025.
For a married taxpayer who is not an active participant but whose spouse is, the phase-out range is two hundred and thirty-six thousand to two hundred and forty-six thousand dollars for 2025. A taxpayer who is neither an active participant nor married to one may always deduct the full traditional IRA contribution regardless of income.
Roth IRA — The After-Tax Vehicle
A Roth IRA, governed by IRC Section 408A enacted as part of the Taxpayer Relief Act of 1997 and effective for taxable years beginning after December 31, 1997, accepts only after-tax contributions — no deduction is allowed under IRC Section 219 for Roth IRA contributions as explicitly stated in IRC Section 408A(c)(1). The economic logic is the inverse of the traditional IRA: the contributor forgoes the upfront deduction but receives a powerful benefit on the back end — qualified distributions from a Roth IRA are entirely excluded from gross income.
A qualified distribution from a Roth IRA is one that meets two conditions simultaneously. The distribution must occur after the account has been open for at least five taxable years — the five-year holding period beginning with the first taxable year for which any contribution was made to any Roth IRA established for the individual. The distribution must also occur after the account holder reaches age fifty-nine and a half, or upon death, disability, or the first-time homebuyer exception of up to ten thousand dollars lifetime.
Roth IRA contributions are subject to income phase-out limits that restrict or eliminate eligibility for higher earners. For 2025, single filers with modified AGI below one hundred and fifty thousand dollars may contribute the full amount. The contribution is phased out between one hundred and fifty thousand and one hundred and sixty-five thousand dollars. Married filing jointly taxpayers face a phase-out range of two hundred and thirty-six thousand to two hundred and forty-six thousand dollars for 2025. Above those upper limits, no Roth IRA contribution is permitted.
Contribution Limits — 2025 and 2026
The annual contribution limit applies in aggregate across all of an individual's traditional and Roth IRAs combined — not to each account separately. For 2025 and 2024, the total annual contribution limit is seven thousand dollars, or the individual's taxable compensation for the year if less than seven thousand dollars. For 2026, this limit increases to seven thousand dollars — confirmed by IRS Notice 2025-67 as no change from 2025 for the base limit.
Individuals age fifty and older may make an additional catch-up contribution above the standard limit. For 2025, the catch-up contribution amount is one thousand dollars, bringing the total permissible contribution to eight thousand dollars for those fifty and older. Beginning in 2026, the IRS confirmed that the catch-up contribution limit for those age fifty and older increases to eleven hundred dollars — the first cost-of-living adjustment to the catch-up amount since it was established, reflecting SECURE 2.0 Act provisions allowing the catch-up amount to be indexed for inflation.
To be eligible to contribute to any IRA, the individual must have taxable compensation during the year — wages, salaries, tips, commissions, self-employment income, or certain other forms of earned income. Passive income, pension income, Social Security benefits, interest, dividends, and capital gains do not qualify as compensation for IRA contribution purposes. A non-working spouse may contribute to a spousal IRA based on the working spouse's compensation, provided the couple files a joint return and total household compensation equals or exceeds combined contributions.
Contributions for a given tax year may be made up to the tax filing deadline — April 15 of the following year — without extension.
Early Withdrawal Penalty — The Ten Percent Additional Tax
Distributions from traditional IRAs and non-qualified distributions from Roth IRAs before age fifty-nine and a half are generally subject to a ten percent additional tax under IRC Section 72(t), in addition to any ordinary income tax owed on the distributed amount. This penalty discourages pre-retirement withdrawals and reinforces the long-term savings purpose of the accounts.
The IRC specifies a list of exceptions to the ten percent additional tax. Distributions made after death are exempt. Distributions to a disabled individual are exempt. Distributions used to pay qualifying unreimbursed medical expenses exceeding a specified percentage of adjusted gross income are exempt. Substantially equal periodic payments made under IRC Section 72(t)(2)(A)(iv) — commonly called SEPP or 72(t) distributions — using IRS-approved calculation methods are exempt. Distributions for health insurance premiums during periods of unemployment, qualified higher education expenses, and first-time homebuyer expenses up to ten thousand dollars lifetime are also exempt. Distributions to qualified military reservists called to active duty qualify for exemption as well.
Required Minimum Distributions
Traditional IRAs are subject to required minimum distribution rules under IRC Section 401(a)(9), which mandate that account holders begin taking minimum annual distributions from the account to prevent indefinite tax deferral.
The SECURE Act of 2019 raised the required beginning date for RMDs from age seventy and a half to age seventy-two. The SECURE 2.0 Act of 2022 — enacted as Division T of Public Law 117-328 — further raised the RMD age to seventy-three for individuals who reach age seventy-two after December 31, 2022, and to seventy-five for individuals who reach age seventy-three after December 31, 2032. The first required minimum distribution must be taken by April 1 of the year following the year in which the account holder reaches the applicable RMD age. All subsequent RMDs must be taken by December 31 of each year.
The annual RMD amount is calculated by dividing the prior December 31 account balance by the applicable distribution period from the IRS Uniform Lifetime Table. Failure to take the required minimum distribution results in an excise tax of twenty-five percent of the shortfall under the SECURE 2.0 Act — reduced from the prior fifty percent rate — and ten percent if the failure is corrected within a specified correction window.
Roth IRAs have no required minimum distributions during the account owner's lifetime. This is one of the most significant practical advantages of the Roth IRA for estate planning — the account can grow and compound tax-free indefinitely, and can be passed to beneficiaries without the owner having been required to take any distributions. Inherited Roth IRAs are subject to the ten-year rule under the SECURE Act for most non-spouse beneficiaries.
Rollovers and Conversions
Assets may be moved between retirement accounts through either a rollover or a direct trustee-to-trustee transfer. A direct transfer — in which funds move directly between account custodians without being received by the account holder — carries no tax consequences and is not limited in frequency. A rollover — in which the account holder receives a distribution and redeposits it in another eligible account — must be completed within sixty days to avoid the distribution being treated as taxable income. Only one IRA-to-IRA rollover per twelve-month period is permitted under IRC Section 408(d)(3)(B).
A Roth conversion is the process of moving funds from a traditional IRA to a Roth IRA. The converted amount is included in gross income in the year of conversion at ordinary income rates — representing the payment of tax on previously deferred income — but the converted funds then grow and are distributed tax-free under the Roth rules. The SECURE 2.0 Act eliminated the prior income limit that had restricted Roth conversions, so any taxpayer regardless of income may convert traditional IRA assets to a Roth IRA. The strategic value of conversion depends on the individual's current versus expected future tax rates, time horizon for the account, and the ability to pay conversion taxes from funds outside the IRA.
Investment Options Within an IRA
An IRA may hold a broad range of investments including stocks, bonds, mutual funds, exchange-traded funds, certificates of deposit, Treasury securities, and other permitted assets. IRC Section 408(a)(3) prohibits IRAs from investing in life insurance contracts. IRC Section 408(m) prohibits collectibles — including artwork, rugs, antiques, metals other than certain bullion coins, gems, stamps, and most coins — with an exception for gold, silver, platinum, and palladium coins issued by the United States government and certain bullion that meets specified fineness standards.
Self-directed IRAs — a structure that allows account holders to invest in alternative assets including real estate, private equity, and private lending within the IRA wrapper — are subject to the same prohibited transaction rules under IRC Section 4975 that govern all IRA investments. A prohibited transaction involving an IRA disqualifies the account and causes the entire account balance to be treated as distributed and subject to income tax and applicable penalties.
Examination Relevance and Key Takeaways
IRAs are tested on the SIE, Series 7, and Series 65 examinations in the context of retirement accounts, tax treatment, contribution limits, eligibility requirements, early withdrawal penalties, and required minimum distributions.
The key points to retain are these.
The traditional IRA under IRC Section 408 may provide a deductible contribution reducing current taxable income — with deductibility phased out for active participants in employer plans based on modified AGI — and provides tax-deferred growth with fully taxable distributions at ordinary income rates. The Roth IRA under IRC Section 408A accepts only after-tax contributions with no deduction allowed, provides tax-free growth, and qualified distributions are entirely excluded from income provided the five-year holding period and age fifty-nine and a half requirements are met.
The 2025 annual contribution limit is seven thousand dollars across all IRAs combined — eight thousand for those age fifty and older using the one-thousand-dollar catch-up.
The 2026 catch-up increases to eleven hundred dollars. Contributions require taxable compensation and may be made until the April 15 tax filing deadline. Early withdrawals before age fifty-nine and a half trigger a ten percent additional tax under IRC Section 72(t) in addition to ordinary income tax, with enumerated exceptions including substantially equal periodic payments, death, disability, unreimbursed medical expenses, and first-time homebuyer expenses up to ten thousand dollars lifetime.
Traditional IRAs require minimum distributions beginning at age seventy-three under the SECURE 2.0 Act for those reaching seventy-two after December 31, 2022, with twenty-five percent excise tax on shortfalls. Roth IRAs have no lifetime required minimum distributions. Only one IRA-to-IRA rollover per twelve-month period is permitted though direct transfers between custodians are unlimited.
