Individual retirement accounts (IRAs) allow investors to save for retirement outside of employer-sponsored plans. This chapter covers two types:
Traditional IRAs
Roth IRAs
Traditional IRAs
Traditional IRAs are non-qualified retirement plans because they aren’t workplace-sponsored. Even so, they work a lot like qualified plans.
Like most qualified plans, traditional IRA contributions may be deductible against earned income. For example, if an investor earns $50,000 and contributes $4,000 to a traditional IRA, they’re taxed on $46,000 of earned income. Distributions are typically fully taxable as ordinary income.
Contribution limit
The contribution limit for IRAs in 2026 is the lesser of $7,500 or the amount of earned income during the year. To contribute, investors must have earned income. If an investor has no reportable earned income, they can’t make a contribution. If they earn less than the contribution limit, they can only contribute up to what they earned.
For example, if Jane earns $3,000 from her part-time job during the year, she can contribute a maximum of $3,000 to her IRA.
Investors may make IRA contributions each year up to the contribution limit. They can also contribute for a specific tax year up until the tax-filing deadline the following year (typically April 15).
For example, an investor can contribute toward 2025’s contribution limit until April 15, 2026. Contributions made between January 1, 2026 and April 15, 2026 must be specifically assigned* to either 2025 or 2026.
*Assume an investor makes their first-ever IRA contribution on February 1, 2026. They must decide whether the contribution counts toward 2025’s $7,000 limit or 2026’s $7,500 limit (the IRA contribution limit increased by $500 in 2026). In most circumstances, it’s better to contribute to the previous year’s limit until it is reached.
Spousal IRAs
As discussed above, only individuals with earned income may contribute to IRAs. However, the IRS allows a working spouse to contribute to a non-working spouse’s IRA.
For example, assume Jane works and is married to John, who is unemployed. Jane can contribute to John’s IRA even though he has no reportable income. This is referred to as a spousal IRA contribution.
Catch-up provision
Investors age 50 or older are eligible for a catch-up provision, which allows an additional contribution of $1,100 per year. This gives investors who missed contributions earlier in life a way to build retirement savings faster.
In 2026, a person age 50 or older may contribute up to $8,600 ($7,500 + $1,100 catch-up).
Deductibility of contributions
Traditional IRA contributions are not always deductible. The tax status depends on three situations:
Investor is not covered by a qualified workplace plan*
Contributions are always deductible
Investor is covered by a qualified workplace plan and low income*
Contributions are always deductible
Investor is covered by a qualified workplace plan and high income*
Contributions are partially deductible or not deductible
*Covered by a qualified workplace plan means the investor has access to a qualified retirement plan through their work. For example, an investor working at a corporation that can contribute to a 401(k) is covered by a qualified plan.
If an investor doesn’t have access to a qualified workplace plan like a 401(k), they can always deduct their traditional IRA contributions. If they do have access to a qualified workplace plan, deductibility depends on income: as income rises, the deduction is reduced and may be eliminated.
You won’t need to know the specific income thresholds for the exam, but you may see questions that test the general idea.
If an investor makes non-deductible contributions to a traditional IRA, they’re taxed only on the growth when a distribution (withdrawal) is taken. The basis (the amount contributed) is returned tax-free upon withdrawal.
Roth IRAs
Roth IRAs are a newer retirement account created in the 1990s. They’re named after Senator William Roth, who proposed them.
A Roth IRA has a “reverse” tax treatment compared with many retirement plans: you don’t get a deduction up front, but qualified withdrawals can be tax-free.
Contributions
Contributions are made after-tax, which means they are not deductible. Roth IRA assets grow tax-sheltered and can be withdrawn in retirement tax-free if meeting specific requirements.
Although contributions aren’t deductible, there are still contribution limits. The same traditional IRA contribution limit of $7,500 per year applies to Roth IRAs.
Also, the contribution limit applies to both IRA types combined. For example, if an investor contributes $3,000 to a traditional IRA, they may only contribute $4,500 to a Roth IRA. If the account owner is age 50 or older, they may contribute an additional $1,100.
Not all investors are eligible to contribute to Roth IRAs. In particular, investors with high incomes can’t contribute. You won’t need to know the specific numbers for the exam, but they’re included below for context.
Distributions
To avoid taxes on Roth IRA distributions, the account owner must meet two requirements:
The owner must be at least 59 ½ years old (otherwise, a 10% early withdrawal penalty is assessed).
The Roth IRA must have been open for at least five years.
For example, an investor who opens their first Roth IRA at age 60 must wait until age 65 to take tax-free withdrawals.
The five-year aging period* for Roth IRAs starts on the first day of the tax year (typically January 1) of the first contribution.
*Investors taking distributions above age 59 1/2 but who haven’t reached the 5-year aging period are subject to ordinary income taxes on the gains above basis, but not the 10% penalty. For example, assume a 60-year-old opens their first Roth IRA and contributes $5,000. Two years later the account is worth $8,000 and the investor requests a full withdrawal. They will pay ordinary income taxes on the $3,000 of growth, but no additional 10% penalty.
We learned in the previous chapter that most retirement plans have required minimum distributions (RMDs) when the account owner turns 73. Roth IRAs are not subject to RMDs. Since taxes aren’t assessed when distributions occur, the IRS doesn’t require Roth IRA owners to take distributions.
Inherited IRAs
Many Americans die with balances in their IRAs. When this happens, beneficiaries (the people who inherit the accounts) must follow specific distribution rules. The Internal Revenue Service (IRS) does not allow assets to remain in tax-sheltered accounts indefinitely.
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