Series 65

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Retirement Plans - Roth Individual Retirement Account

Roth IRAs have a very different tax structure than Traditional IRAs. Contributions are notdeductible. However, earnings may be withdrawn tax-free (rather than tax-deferred) if the following conditions are met:

  • Withdrawals do not occur until the account has been open at least five years;
    AND
  • Withdrawals do not occur until the Roth IRA owner reaches age 59 and a half


This is a very powerful vehicle, since virtually all other retirement accounts offer only tax-deferral on the earnings. However, income limits do apply. The chart below shows the maximum amount of income permitted to make the full contribution, as well as the phase-out income range for a partial contribution:

Filing Status Full Contribution Partial Contribution
Single or Head of Household Up to $110,000 $110,000-$125,000
Married Filing Jointly Up to $173,000 $173,000-$183,000


Roth IRA Specifics:

  • Contributions are permitted after age 70 and a half (assuming there is earned income).

  • There are no mandatory minimum required distribution rules at any age.

  • Withdrawals are made on a FIFO basis (first in, first out) - so any withdrawals made come from contributions first. Therefore, no earnings are considered withdrawn until all contributions have been withdrawn.

  • Withdrawals of contributions are not taxable or penalized - even if they are made before age 59 and a half or before the account has been open for five years.

  • Withdrawals of earnings are taxed but not penalized under the same exceptions listed for Traditional IRAs.

Determining which IRA is best for a client is an important decision. Deductibility, contribution age and income limitations, tax treatment of distributions and minimum distribution are some of the many factors to consider. We detail these factors within the article Roth or Traditional IRA... Which Is The Better Choice?


Exam Tips and Tricks
Consider these sample exam questions about IRAs:

Which of the following statements about Traditional IRAs are TRUE?

Contributions are allowed based on earned income only

  • Contributions always reduce taxable income
  • Contributions may be made even if the individual is covered by an employer's retirement plan
  • Contributions may not be made after age 70 and a half
    1. I & II
    2. II, III, & IV
    3. I, III, & IV
    4. I, II, III, & IV

    The correct answer is "c", since contributions may not reduce taxable income if the person is not eligible to deduct the contribution.


    1. Which of the following clients is best suited for a Roth IRA instead of a Traditional IRA?
      1. Someone who is in a high tax bracket now and expects to be in a much lower tax bracket in retirement
      2. Someone who is in a low tax bracket now and expects to be in a much higher tax bracket in retirement
      3. Someone who is covered by a retirement plan at work and can only make a non-deductible contribution to a Traditional IRA because of a high income
      4. Someone who is in a moderate tax bracket now and expects to be in a lower tax bracket in retirement
      1. I & II
      2. II & III
      3. II, III, & IV
      4. I, II, III, & IV

    The correct answer is "b" - the Roth IRA is the better choice for client II, since the IRA deduction is worth less to someone in a low bracket and the tax-free withdrawals will be more valuable to someone in a higher bracket. Also, it's always better to make a non-deductible Roth IRA contribution than a non-deductible Traditional IRA contribution. The clients described in I and IV expect to be in a lower tax bracket at retirement, so they may be better off taking the tax deduction now.


    Qualified Retirement Plans
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