Series 65

Retirement Plans - Traditional Individual Retirement Accounts (IRAs)


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.



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