Retirement Plans - Individual Plans

Individuals may set up a retirement plan for themselves that are qualified and allow contributions to the plan to be made with pre-tax dollars. Individuals may also purchase investment products such as annuities that allow their money to grow tax deferred. The money used to purchase an annuity has already been taxed making an annuity a non- qualified product.

Individual Retirement Accounts (IRAs)

All individuals with earned income may establish an IRA for themselves. Contributions to traditional IRA’s may or may not be tax deductible depending on the individual’s level of adjusted gross income and whether or not the individual is eligible to participate in an employer sponsored plan. Individuals who do not qualify to participate in an employer sponsored plan, may deduct their IRA contributions regardless of their income level. The level of adjusted gross income that allows an investor to deduct their IRA contributions

has been increasing since 1998. These tax law changes occur too frequently to make them a practical test question. Our review of IRA’s will focus on the four main types, which are:

  • Traditional
  • Roth
  • SEP
  • Educational

Traditional IRA

A traditional IRA allows an individual to contribute a maximum of 100% of earned income or $5,500 per year or up to $11,000 per couple. If only one spouse works, the working spouse may contribute $5,500 to an IRA for themselves and $5,500 to a separate IRA for their spouse, under the nonworking spousal option. Investors over fifty may contribute up to $6,500 of earned income to their IRA. Regardless of whether the IRA contribution was made with pretax or after-tax dollars, the money is allowed to grow tax deferred. All withdrawals from an IRA are taxed as ordinary income regardless of how the growth was generated in the account. Withdrawals from an IRA prior to age

591/2 are subject to a 10% penalty tax as well as ordinary income taxes. The 10% penalty will be waived for first time homebuyers or educational expenses for the taxpayer’s child, grandchildren, or spouse. The 10% penalty will also be waived if the payments are part of a series of substantially equal payments. Withdrawals from an IRA must begin by April 1st of the year following the year in which the taxpayer reaches 701/2. If an individual fails to make withdrawals that are sufficient in size and frequency, the individual will be subject to a 50% penalty on the insufficient amount. An individual who makes a contribution to an IRA that exceeds 100% of earned income or the annual limit, whichever is less, will be subject to a penalty of 6% per year on the excess amount for as long as the excess contribution remains in the account.

Roth IRA

A Roth IRA is a nonqualified account. All contributions made to a Roth IRA, are made with after-tax dollars. The same contribution limits apply for Roth IRA’s. An individual may contribute the lesser of 100% of earned income to a maximum of $5,500 per person or $11,000 per couple. Any contribution made to a Roth IRA reduces the amount that may be deposited in a traditional IRA and vice versa. All contributions deposited in a Roth IRA are allowed to grow tax deferred and all of the growth may be taken out of the account tax-free provided that the individual has reached age 591/2, and the assets have been in the account for at least five years. A 10% penalty tax will be charged on any withdrawal of earnings prior to age 591/2, unless the owner is purchasing a home, has become disabled, or has died. There are no requirements for an individual to take distributions from a Roth IRA by a certain age.


Individuals and couples who are eligible to open a Roth IRA may convert their traditional IRA to a Roth IRA. The investor will have to pay income taxes on the amount converted, but will not be subject to the 10% penalty.

Simplified Employee Pension IRA / SEP IRA

A SEP IRA is used by small corporations and self-employed individuals to plan for retirement. A SEP IRA is attractive to small employers because it allows them to set up a retirement plan for their employee’s rather quickly and inexpensively. The contribution limit for a SEP IRA far exceeds that of traditional IRA’s. The contribution limit is the lesser of 25% of the employee’s compensation or $52,000 per year. Should the employee wish to make their annual IRA contribution to their SEP IRA, they may do so or they may make their standard contribution to a traditional or Roth IRA.

Series 62 exam prep

Related Articles
  1. Professionals

    Series 99

    FINRA/NASAA Series 99 Exam Guide
  2. Professionals

    Series 24

    FINRA/NASAA Series 24 Exam Guide
  3. Professionals

    Becoming A Registered Investment Advisor

    To become a registered investment advisor requires specific licensing, qualifications and regulations, but the greater freedom may be worth it.
  4. Investing Basics

    How To Handle A Serious Dispute With Your Broker

    Find out what to do if you have a dispute with your broker.
  5. Professionals

    Hedge Funds and the Law

    Learn how hedge funds have gotten in trouble for illegal insider trading. Read about questionable high-frequency trading (HFT) strategies.
  6. Professionals

    Career Advice: Financial Analyst Vs. Investment Banker

    Read an in-depth comparison about working as a Financial Analyst vs. working as an Investment Banker, two highly prestigious business careers.
  7. Professionals

    Who Needs to Take the Series 65?

    Most states require individuals to pass the Series 65 exam in order to act as investment advisors.
  8. Investing Basics

    How to Vet Financial Advisors Via BrokerCheck

    Many people research restaurants or movies, but few select brokers or financial advisors with much research. Here's how BrokerCheck can help.
  9. Professionals

    Career Advice: Financial Planner Vs. Stockbroker

    Read an in-depth review of a career as a financial planner as opposed to a career as a stockbroker, including how to decide which is best for you.
  10. Term

    Understanding the Maintenance Margin

    A maintenance margin is the minimum amount of equity that must be kept in a margin account.
  1. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin ...
  2. Series 6

    A securities license entitling the holder to register as a limited ...
  3. Comprehensive Automated Risk Data ...

    The Comprehensive Automated Risk Data System (CARDS) is an initiative ...
  4. Corporate Financing Committee

    A regulatory group that reviews documentation that is submitted ...
  5. Series 79

    A examination to ensure a candidate is qualified to become a ...
  6. Research Analyst

    A person who prepares investigative reports on equity securities. ...
  1. How does FINRA differ from the SEC?

    With all the financial organizations out there, knowing what they all do can be as complicated as knowing where to invest. ... Read Full Answer >>
  2. How can I find out if my employer is a member of FINRA?

    To find out if your employer is a member of the Financial Industry Regulatory Authority or FINRA (previously the National ... Read Full Answer >>
  3. I have a CFA designation. Do I qualify for any exemptions from FINRA licensing exams?

    Unfortunately, a CFA charter does not qualify you for any FINRA exam exemptions. Read Full Answer >>
  4. Am I qualified once I complete my FINRA certification exam?

    Even if you have completed your Financial Industry Regulatory Authority or FINRA (previously the National Association of ... Read Full Answer >>
  5. Are hedge funds regulated by FINRA?

    Alternative investment vehicles such as hedge funds offer investors a wider range of possibilities due to certain exceptions ... Read Full Answer >>
  6. How are variable annuities regulated?

    The sale of a variable annuity is regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory ... Read Full Answer >>
Hot Definitions
  1. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  2. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  3. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  4. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  5. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
  6. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability ...
Trading Center