There are two types of Individual Retirement Accounts (IRAs) - Traditional and Roth. Each has unique eligibility rules and tax treatment, but the contribution limits are identical. Catch-up limits also apply to both IRA types and are available to those aged 50 and older.

These amounts are scheduled to rise over time as shown below:

YEAR Contribution Catch-up
2007 $4,000 $1,000
2008 $5,000 $1,000
2009 Indexed for inflation $1,000



Look Out!
The limits above apply jointly to both Traditional and Roth IRAs. For example, a 40-year-old client can contribute a total maximum of $4,000 in 2005 - so he/she could contribute $1,000 to a Traditional IRA and $3,000 to a Roth IRA, but not $4,000 to each.


Not all types of investments are permitted within IRAs. Permissible investments include stocks, bonds, mutual funds, annuities, government securities, and gold or silver coins minted by the U.S. Treasury. Other investments, such as collectibles, insurance policies, art, and other types of coins, are not permitted.

Traditional IRA
Any employed person is eligible to contribute to a Traditional IRA. However, the ability to deduct that contribution is subject to the following eligibility rules:

  • If a person is not currently covered by a retirement plan at work, IRA contributions are deductible in full.

  • If a person is currently covered by a retirement plan at work, IRA contributions are deductible only if income is less than the limits shown below:
YEAR Single Return Joint Return
2007 $50,000-$60,000 $80,000-$100,000
  • If income falls between the limits shown above, the contribution will be partially deductible - the deduction is "phased out" in proportion to the amount by which the income exceeds the lower limit in the range.

  • For a married couple, if only one spouse is covered by a pension plan, a different phase-out rule applies:
    • If combined income is $150,000 or less, the contribution for the non-covered spouse is fully deductible.

    • If combined income is between $150,000 and $160,000, a proportional phase-out applies.

    • If combined income is $160,000 or higher, no deduction applies.

    • These rules apply only to the non-covered spouse; contributions by the covered spouse are not deductible.


Look Out!
On the exam, you will not be tested on the actual dollar values for the phase-out. However, you will need to know that clients with high incomes are subject to different phase-out rules.


Traditional IRA Specifics:

  • Earnings are tax deferred until withdrawn.

  • If deductible contributions are made, 100% of withdrawals are subject to taxation at ordinary income rates.

  • If non-deductible contributions are made, a portion of each withdrawal is not taxable.

  • Withdrawals made prior to age 59 and a half are subject to a 10% penalty, unless one of the following exceptions applies:
    • Death
    • Disability
    • Eligible education expenses
    • First-time home-buying expenses (up to $10,000)
    • Distributions made over the life expectancy of the IRA owner

  • Contributions may not be made after the IRA owner turns 70 and a half - even if he or she is still employed.

  • Distributions made over the life expectancy of the IRA owner must begin no later than April 1 of the year following the year in which the owner turns 70 and a half.

  • If a person fails to withdraw any amount that should have been distributed under these mandatory minimum requirements, a 50% tax penalty applies to the amount not distributed.


Roth Individual Retirement Account

Related Articles
  1. Retirement

    Roth vs. Traditional IRA: Which Is Right For You?

    To answer this question, you need to consider several of the factors we outline here.
  2. Financial Advisor

    IRAs: Top Things You Need to Know About Them

    By understanding the major rules for both traditional and Roth IRAs, you'll be prepared to enjoy the benefits of these investment opportunities.
  3. Retirement

    IRA Contribution Limits in 2016

    Find out about the 2016 limits for contributions and income thresholds for individual retirement accounts, including traditional IRAs and Roth IRAs.
  4. Retirement

    How Much It Takes to Max Out Your IRA

    IRAs have certain tax advantages that allow your nest egg to grow at a faster rate. But there are annual limits on how much you can contribute.
  5. Retirement

    11 Things You May Not Know About Your IRA

    These little-known features will help you get the most out of your retirement savings.
  6. Retirement

    Tips On How To Use IRAs To Boost Retirement Savings

    According to the Trustees of the Social Security Fund, the fund will be depleted by 2037. Are you ready?
  7. Retirement

    An Introduction To Correcting Ineligible IRA Contributions

    Eager to save for retirement? Find out how to avoid overpayment penalties.
Frequently Asked Questions
  1. What are the Differences Among a Real Estate Agent, a broker and a Realtor?

    Learn how agents, realtors, and brokers are often considered the same, but in reality, these real estate positions have different ...
  2. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ...
  3. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ...
  4. What is the 1003 mortgage application form?

    Learn about the 1003 mortgage application form, what information it requires and why this form is the industry standard for ...
Trading Center