Retirement Plans
Retirement Plans
Retirement accounts are a thicket of acronyms, limits, eligibility tests, and distribution rules. The Series 66 expects working command of the major types (IRAs, qualified employer plans, small-business, nonqualified), contribution and deductibility rules, the qualified-vs-nonqualified distinction, RMD timing under SECURE Act 2.0, the 10% early-withdrawal penalty and its exceptions, rollover mechanics, Roth conversions, and the SECURE 10-year rule for inherited IRAs. Five sections: IRAs; qualified employer plans (401(k), 403(b), 457(b), DB vs DC); small-business and nonqualified (SIMPLE, SEP, NQDC); distributions and rollovers; Roth conversions and inherited-IRA rules. One interactive: a Roth-vs-Traditional break-even calculator that surfaces when the tax-rate trajectory favors one over the other.
Individual Retirement Accounts
Traditional IRA — contribution limit and deductibility phase-out
Anyone with earned income can CONTRIBUTE to a Traditional IRA (no income limit on contributions). DEDUCTIBILITY of the contribution from current taxable income depends on two factors:
- Active participation in an employer-sponsored retirement plan (401(k), 403(b), pension) triggers MAGI-based deductibility phase-outs.
- MAGI. Single active participant: deduction phases out ~$77K-$87K MAGI. MFJ active participant: ~$123K-$143K. Non-active-participant spouse: ~$230K-$240K MFJ. Above the upper boundary: NO DEDUCTION (but contribution still permitted — creates a NONDEDUCTIBLE Traditional IRA tracked on Form 8606).
2024+ contribution limit (indexed): $7,000 base + $1,000 catch-up (age 50+) = $8,000 max. Deadline: tax-filing deadline (April 15 of next year), not December 31. SECURE Act removed the age 70½ ceiling — contributions allowed at any age with earned income.
The nondeductible Traditional IRA is the building block for the backdoor Roth strategy (Section 5).
Roth IRA — income limits and the contribution phase-out
Same combined contribution limit as Traditional ($7K + $1K catch-up for 50+ — ACROSS both account types, not each). Two critical differences from Traditional:
- Contributions never tax-deductible. Made with after-tax dollars. Qualified distributions are TAX-FREE on both growth and withdrawal.
- Income LIMIT on contributions. Single: phases out ~$146K-$161K MAGI. MFJ: ~$230K-$240K. Above the upper boundary, no DIRECT Roth contribution. (Traditional has no contribution income limit, only deduction limit — key distinction.)
Key features: tax-free growth/withdrawal on qualified distributions (age 59½ AND 5-year rule); NO RMDs during owner's lifetime; contributions (basis) can be withdrawn anytime tax-free and penalty-free (earnings are not); no age limit. For high earners above the phase-out, the BACKDOOR ROTH (Section 5) provides indirect access.
Roth IRAs have TWO separate 5-year rules that operate independently:
- QUALIFIED-WITHDRAWAL 5-year rule. Earnings tax-free only if account has been open 5 TAX YEARS AND owner is 59½+ (or meets exception: death, disability, $10K first-home). Clock starts JANUARY 1 of the year FOR which the first contribution was made — a March 2024 contribution for tax year 2023 starts the clock January 1, 2023.
- CONVERSION 5-year rule. EACH Roth conversion starts its own 5-year clock. Conversion principal can be withdrawn penalty-free after 5 years OR 59½, whichever comes first. Prevents converting Traditional → Roth and immediately withdrawing penalty-free.
Meeting one rule doesn't satisfy the other. Exam most often tests rule 1.
A single taxpayer earning $95,000 MAGI is an ACTIVE PARTICIPANT in their employer's 401(k). They want to contribute to a Traditional IRA. The federal tax treatment is:
A single taxpayer with MAGI of $155,000 in 2024 wants to contribute to a Roth IRA. The Roth contribution phase-out for single filers is ~$146K-$161K. The maximum DIRECT contribution allowed is:
Required Minimum Distributions (RMDs) begin at age 73 under SECURE Act 2.0 for most tax-advantaged retirement accounts. Which plan does NOT require RMDs during the original owner's lifetime?
Qualified employer plans
401(k) — the workhorse qualified plan
- Elective deferral limit (2024): $23,000 + $7,500 catch-up (age 50+) = $30,500. SECURE 2.0 adds enhanced catch-up of $10K+ for ages 60-63 starting 2025.
- Annual additions limit (combined employee + employer): lesser of 100% of compensation or $69,000 (2024).
- Traditional vs Roth 401(k). Most plans offer both. SECURE 2.0 eliminated Roth 401(k) RMDs during owner's lifetime (effective 2024) — aligning with Roth IRA.
- Vesting on employer match. Either 3-year cliff (100% after 3 years) or 6-year graded (20%/year starting year 2). Employee's OWN deferrals are always 100% vested immediately.
- Loans. Up to 50% of vested balance or $50K (lesser); must repay within 5 years (longer for primary residence). Separation without repayment = taxable distribution + 10% penalty if under 59½.
Solo 401(k): for self-employed with no employees (spouse allowed). Both employee deferral AND employer contribution roles — highest contribution capacity for sole proprietors.
403(b) and 457(b) — parallel tracks for nonprofits and government
- 403(b) eligibility. Public schools, universities, hospitals, 501(c)(3) nonprofits. Similar contribution limits to 401(k).
- 403(b) special 15-year catch-up. Employees with 15+ years of service at the same qualifying employer can contribute EXTRA $3,000/year above standard limits, up to $15,000 lifetime. Unique to 403(b).
- 403(b) investment limitations. Historically restricted to annuities and mutual funds — insurance-company product focus persists.
- 457(b) eligibility. State/local government (“governmental 457”) or certain tax-exempt organizations (“top hat”/nongovernmental, highly compensated only).
- 457(b) governmental: NO 10% early-withdrawal penalty. The most-tested 457(b) feature. Distributions before 59½ still ordinary-income taxed but no penalty. Especially valuable for public safety / early retirees.
- 457(b) final-3-year double catch-up. In final 3 years before normal retirement age, can contribute up to DOUBLE the annual limit if previous limits weren't maxed.
- Concurrent contributions. Employees of organizations offering BOTH 403(b) and 457(b) (some hospitals) can max BOTH separately — doubling tax-deferred capacity.
Defined benefit vs. defined contribution
| Feature | Defined Benefit (DB) | Defined Contribution (DC) |
|---|---|---|
| What's “defined” | Benefit at retirement (formula) | Contribution input only |
| Investment risk | EMPLOYER bears risk | EMPLOYEE bears risk |
| Examples | Pension, cash balance | 401(k), 403(b), 457(b), SEP, SIMPLE |
| PBGC insurance | YES — insures DB benefits | NO — no benefit to insure |
| Trend | DECLINING — most frozen | EXPANDING — dominant since 1980s |
Cash balance plans are a hybrid: technically DB (employer guarantees a notional balance and growth rate) but LOOK like DC (each participant has an account balance). Common in professional service firms.
An employee of a public school district participates in a 403(b) plan and has completed 18 years of service with the district. Which contribution rule unique to 403(b) plans applies?
A 52-year-old police officer working for a state government participates in a governmental 457(b) plan and wishes to retire and immediately access funds. Compared to a 401(k) participant in the same situation, the 457(b) participant's tax treatment is:
An employee in a TRADITIONAL DEFINED BENEFIT pension separates after 20 years. Compared to a 401(k) defined contribution participant, the DB participant's retirement security is characterized by:
Small business and nonqualified plans
SIMPLE IRA and SEP IRA — small-business workhorses
Both use individual IRAs as the contribution vehicle — not a centralized trust. Both classified as qualified plans for certain ERISA purposes.
SIMPLE IRA
- Employers with 100 OR FEWER employees. Both employee deferrals AND employer contributions.
- Employee deferral limit 2024: $16,000 + $3,500 catch-up. Lower than 401(k).
- Employer MANDATORY: 100% match up to 3% OR 2% nonelective for all eligible (including non-participants).
- Vesting: 100% immediate.
- First-2-year ENHANCED 25% penalty on early withdrawals (not the usual 10%).
SEP IRA
- Any size employer including self-employed. EMPLOYER CONTRIBUTIONS ONLY — employees can't defer.
- Up to 25% of compensation, max $69,000 (2024). Highest small-business contribution capacity for high earners.
- Must cover all employees age 21+ who worked 3 of last 5 years and earned a minimum threshold ($750 in 2024).
- Vesting: 100% immediate.
- Best for sole proprietors or very small partnerships where owners benefit equally.
Nonqualified deferred compensation (NQDC) and IRC 409A
NQDC plans operate OUTSIDE qualified-plan rules. They let employers defer compensation for highly compensated employees beyond qualified-plan limits, with significant trade-offs:
- Plan assets subject to employer's creditors. Unlike qualified plans (assets held in trust insulated from creditors), NQDC obligations are unsecured promises. Employer bankruptcy = participants are general creditors and may lose all deferred amounts.
- No nondiscrimination testing. Can be limited to select management or highly compensated (“top hat” plans). No requirement to cover rank-and-file.
- No contribution limits. Unlimited deferral subject only to plan terms.
- IRC 409A timing rules. Deferral elections must be made BEFORE compensation is earned. Distributions only on six specified events: separation, death, disability, change in control, unforeseeable emergency, fixed date. Violations = immediate taxation + 20% additional tax + interest.
- Rabbi trust. Grantor trust that holds NQDC assets — protects against employer change-of-heart but NOT against creditors. Most common NQDC structure.
A small business with 6 employees wants a retirement plan with EMPLOYEE salary deferrals plus EMPLOYER contributions, with low administrative burden. Among small-business options, the BEST fit is typically:
A nonqualified deferred compensation (NQDC) plan differs from a qualified plan primarily because NQDC plans:
Distributions and rollovers
RMDs — age 73 (SECURE 2.0) and the path to 75
| If you turn 72 in... | RMD start age | Required Beginning Date |
|---|---|---|
| 2019 or earlier | 70½ | April 1 after year of 70½ |
| 2020-2022 | 72 | April 1 after year of 72 |
| 2023+ | 73 (current SECURE 2.0) | April 1 after year of 73 |
| 2033+ | 75 (future SECURE 2.0) | April 1 after year of 75 |
- Calculation. December 31 prior-year balance ÷ IRS Uniform Lifetime Table factor.
- First-year double-up trap. First RMD can be delayed to April 1 of the following year — but the second-year RMD is still due by that same December 31. Two RMDs in one calendar year can push retiree into higher bracket.
- Excess accumulation tax. Pre-SECURE 2.0: 50% penalty. SECURE 2.0: reduced to 25%, further to 10% if corrected within window.
- Roth exception. Roth IRAs — NO lifetime RMDs. SECURE 2.0 also eliminated Roth 401(k) RMDs (effective 2024).
10% early-withdrawal penalty — the exception list
Withdrawals before 59½ generally incur 10% additional tax. Exceptions are testable specifically:
| Exception | Applies to | Cap |
|---|---|---|
| Death | All | None |
| Permanent disability | All | None |
| Medical expenses | All | Above 7.5% of AGI |
| Higher education | IRAs ONLY | Qualified costs |
| First-time home | IRAs ONLY | $10,000 lifetime |
| SEPP (72(t)) | All | 5 yrs or to 59½, whichever longer |
| Separation at 55+ | 401(k)/403(b) ONLY (NOT IRAs) | Year of 55 or later |
| Public safety officer | Govt plans | Age 50 |
| Birth/adoption | All (SECURE) | $5,000 per child |
Key distinctions: $10K first-time home is IRA-ONLY. Age 55 separation is QUALIFIED-PLAN ONLY. The trap: an employee who rolls a 401(k) to an IRA at age 56 LOSES the age-55 exception. Stay in 401(k) until 59½ if pre-59½ withdrawals are expected.
Rollovers — 60-day rule, withholding trap, trustee-to-trustee
- Trustee-to-trustee transfer. Direct movement between same-type accounts (Traditional IRA to Traditional IRA at new custodian). NO 60-day clock, NO withholding, NOT counted against once-per-year limit. Preferred mechanism.
- Direct rollover. Distribution from qualified plan made DIRECTLY to IRA or another qualified plan (check payable to receiving custodian). No withholding, no 60-day clock.
- Indirect rollover (60-day). Distribution payable to PARTICIPANT, who has 60 days to redeposit. Trap: 20% MANDATORY federal withholding for distributions from qualified plans. A $100K distribution becomes $80K in hand; to complete a full rollover, participant must come up with the missing $20K from other funds within 60 days (the withheld $20K is recovered at tax time).
- Once-per-year (IRA). Only ONE indirect rollover per 12 months across ALL the taxpayer's IRAs (aggregated). Trustee-to-trustee transfers don't count.
- 60-day deadline is absolute. Miss by one day = taxable (and 10% penalty if under 59½). IRS waiver criteria narrow.
A 45-year-old single parent withdraws $25,000 from their Traditional IRA: $15,000 for child's college tuition and $10,000 as a down payment on the parent's FIRST home. Both occur in the same tax year. The 10% early-withdrawal penalty that applies is:
Under SECURE Act 2.0 effective beginning in 2024, REQUIRED MINIMUM DISTRIBUTIONS for a designated Roth 401(k) account are:
A 50-year-old rolls a 401(k) from a former employer into an IRA at a new custodian. The 401(k) plan sends a CHECK PAYABLE TO THE CLIENT. The most important consideration is:
Conversions and beneficiary rules
Roth conversions and the backdoor strategy
A Roth CONVERSION moves money from Traditional IRA (or pre-tax 401(k)) to Roth IRA. The pre-tax amount is taxed as ORDINARY income in the conversion year; future growth and qualified withdrawals are tax-free.
- No income limit on conversions. Anyone can convert. (Roth CONTRIBUTIONS have income limits; conversions do not.)
- No conversion limit. No maximum per year — though tax planning typically converts in chunks to manage bracket creep.
- Each conversion has its own 5-year clock (the conversion 5-year rule).
- Conversions cannot be reversed. TCJA 2017 eliminated recharacterization.
- Pro-rata rule. If a taxpayer has BOTH deductible and nondeductible Traditional IRA balances, any conversion is PRO-RATA across the two. Cannot cherry-pick to convert only nondeductible portion.
Backdoor Roth strategy
For high earners above the Roth contribution income limit:
- Contribute to a NONDEDUCTIBLE Traditional IRA (no income limit on contribution). Report basis on Form 8606.
- Soon after, convert the Traditional IRA to a Roth. Only growth between contribution and conversion is taxable (typically minimal if done immediately).
- Net effect: high earners get money into Roth without violating the Roth contribution limit.
Backdoor trap: the pro-rata rule. If the taxpayer has OTHER pre-tax Traditional IRA balances (e.g., 401(k) rollover), the conversion is pro-rata across ALL Traditional IRA balances — making most of the conversion taxable. Workaround: roll the pre-tax balance back INTO a current employer 401(k) first (employer plans aren't aggregated for pro-rata), leaving only the nondeductible contribution to convert.
Roth vs. Traditional break-even calculator
Same dollar contribution to each, same growth rate. Canonical rule: Traditional wins when retirement tax rate < current tax rate; Roth wins when retirement rate is higher; equal when they match.
Inherited IRAs — SECURE Act 10-year rule
The SECURE Act (December 2019) dramatically changed inherited IRA rules. Before SECURE, non-spouse beneficiaries could “stretch” distributions over their own life expectancy — potentially decades of continued deferral. Post-SECURE, most non-spouse beneficiaries face a HARD 10-YEAR DEADLINE.
- 10-year rule for non-spouse non-eligible designated beneficiaries. ENTIRE inherited IRA must be distributed by December 31 of the 10th year after death. Year-10 lump sum allowed but typically pushes recipient into highest bracket.
- Spouse beneficiaries retain the stretch. Spouse can ROLL the inherited IRA into their OWN IRA (treating it as theirs) or remain as beneficiary — either way can use own life-expectancy distributions.
- Eligible designated beneficiaries (exempt from 10-year rule). Five categories retain stretch: surviving spouse; minor children of decedent (until age of majority); disabled or chronically ill; beneficiaries not more than 10 years younger than decedent.
- Non-designated beneficiaries (estate, non-qualifying trust, charity). Subject to 5-year rule if decedent died before required beginning date.
- Inherited Roth IRA also subject to 10-year rule for non-spouse beneficiaries — even though no tax is owed on Roth distributions, the account must be fully distributed within 10 years. Removes the Roth stretch from estate planning.
A 55-year-old taxpayer with $500K in a Traditional IRA wants to convert to a Roth. The taxpayer has MAGI of $250,000 (well above the Roth contribution income limit). Which statement BEST describes Roth conversion rules?
A high-earning client has $7,000 of after-tax cash but MAGI above the Roth contribution limit. They want to maximize Roth assets. The BACKDOOR ROTH strategy involves:
An investor died in 2024 leaving a $400K Traditional IRA to their adult child (age 45, not disabled, not chronically ill). The child is the sole beneficiary. The child's required distribution timing is:
Chapter summary
Individual Retirement Accounts — baseline summary
Traditional IRA
- Contributions may be tax-deductible (depends on income and employer plan coverage)
- Earnings grow tax-deferred
- Withdrawals taxed as ordinary income
- RMDs beginning at age 73 (SECURE Act 2.0)
- 10% early-withdrawal penalty before 59½ (with exceptions)
Roth IRA
- Contributions NOT tax-deductible (after-tax money)
- Earnings grow tax-free
- Qualified distributions (age 59½ + 5-year rule) are tax-free
- NO RMDs during owner's lifetime
- Contributions can be withdrawn at any time, penalty- and tax-free
- Income limits apply to contributions (phased out at higher MAGI)
Employer-sponsored plans — baseline summary
Qualified Plans (ERISA-governed)
- 401(k). Employee deferrals + possible employer match. Traditional and Roth options.
- Solo 401(k). Self-employed with no employees (spouse allowed). Traditional and Roth.
- 403(b). Public schools and tax-exempt 501(c)(3) organizations. Similar to 401(k).
- 457(b). State/local government and certain tax-exempts. NO 10% early-withdrawal penalty (governmental).
- Defined benefit (pension). Employer guarantees specified benefit at retirement. Employer bears investment risk.
- Profit-sharing. Employer discretionary contributions allocated by formula.
All qualified plans subject to ERISA: nondiscrimination testing, vesting, fiduciary duties, creditor protection. See Chapter 24 for ERISA specifics.
Small business and nonqualified plans — baseline summary
SIMPLE IRA
- Employers with 100 OR FEWER employees
- Employee deferrals + MANDATORY employer match (up to 3%) or 2% nonelective
- Lower contribution limits than 401(k)
- Enhanced 25% penalty for distributions in first 2 years if under 59½
SEP IRA
- Employer-only contributions — employees cannot defer
- Up to 25% of compensation (max $69,000 in 2024)
- Easy to establish and administer
- Best for sole proprietors and very small businesses
Nonqualified Plans
- NOT subject to ERISA rules and contribution limits
- Often used for executives and highly compensated
- Subject to employer's creditors (key disadvantage)
- Operate under IRC 409A timing rules
Traditional IRA vs. Roth IRA — complete comparison
| Feature | Traditional IRA | Roth IRA |
|---|---|---|
| Tax on contributions | May be tax-deductible | Not deductible (after-tax) |
| Tax on growth | Tax-deferred | Tax-free |
| Tax on withdrawals | Ordinary income tax | Tax-free (qualified) |
| RMDs | Required at age 73 (SECURE 2.0) | NONE during owner's lifetime |
| Income limits | Limits on DEDUCTION for active participants | Limits on CONTRIBUTION |
| Contribution limit | $7,000 (+$1K catch-up 50+) in 2024 | Same (combined limit) |
| When to choose | Expecting LOWER retirement tax rate | Expecting HIGHER retirement rate; estate planning |
SECURE Act 2.0 — key changes (testable)
- RMD age 73 (from 72) for those turning 72 after 2022; rises to 75 in 2033
- Roth 401(k) RMDs eliminated during owner's lifetime (aligning with Roth IRA)
- 529-to-Roth IRA rollovers — unused 529 funds can roll to beneficiary's Roth IRA (lifetime limit; 529 open 15+ years)
- Birth/adoption $5,000 withdrawal exception (no 10% penalty)
- Enhanced catch-up ages 60-63: $10,000+ starting 2025
- Excess accumulation tax reduced from 50% to 25% (further to 10% if corrected)
- Mandatory Roth catch-up for high earners ($145K+ wages) in 401(k) plans starting 2026
Employer plans — quick reference table
| Plan | Who contributes | Key feature |
|---|---|---|
| 401(k) | Employee + employer match | Salary deferrals; Roth option; highest limits |
| 403(b) | Employee + employer | Public schools, 501(c)(3); 15-year catch-up |
| 457(b) | Employee (+ employer if govt) | State/local govt; NO 10% early penalty |
| SEP IRA | Employer only | Up to 25% of compensation; ideal self-employed |
| SIMPLE IRA | Employee + mandatory employer | Small employers (≤ 100); simplified admin |
| Solo 401(k) | Self-employed (both roles) | Highest capacity for sole proprietors |
| Defined benefit | Employer only | Guaranteed benefit; employer bears risk |
Unlike 401(k) and 403(b), 457(b) GOVERNMENTAL plans do NOT impose a 10% early-withdrawal penalty for distributions before age 59½. Withdrawals are still taxed as ordinary income, but there is no penalty. This makes 457(b) uniquely valuable for public-sector employees (police, firefighters, teachers) who may retire well before 59½, and is a frequently tested distinction on the Series 66.
- “Roth conversions have an income limit.” WRONG — Roth CONTRIBUTIONS have income limits; CONVERSIONS do not.
- “Age-55 separation-from-service exception applies to IRAs.” WRONG — qualified plans (401(k), 403(b)) ONLY. Rolling to an IRA destroys the exception.
- “$10K first-time homebuyer applies to 401(k)s.” WRONG — IRA-only.
- “457(b) is just like a 401(k).” WRONG — governmental 457(b) has NO 10% early-withdrawal penalty.
- “Trustee-to-trustee transfers count against the one-per-year limit.” WRONG — only INDIRECT 60-day rollovers count. Trustee-to-trustee transfers are unlimited.
- “20% mandatory withholding applies to all distributions.” WRONG — only INDIRECT rollovers from qualified plans.
- “Stretch IRA still exists for grandchildren.” WRONG (post-SECURE) — non-spouse non-eligible designated beneficiaries are subject to the 10-year rule.
- “Backdoor Roth is tax-free if you have other IRAs.” WRONG — pro-rata rule across ALL Traditional IRAs makes most of the conversion taxable when pre-tax balances exist.
- “SIMPLE IRA early withdrawal is 10%.” WRONG in first 2 years — ENHANCED 25% penalty.
- “Roth IRA contributions can't be withdrawn before 59½.” WRONG — CONTRIBUTIONS (basis) can be withdrawn anytime tax- and penalty-free. EARNINGS are subject to the rules.
Test yourself with exam-style questions on this topic.