Section 2
Function 2: Opens Accounts and Evaluates Customer Profiles
Retirement plans and tax-advantaged accounts
53 min read
· Lesson 4 of 5
About This Lesson
More of the money you will manage as a registered representative sits inside retirement accounts than anywhere else, and the exam responds in kind: this is one of the most heavily tested chapters in the accounts module. The good news is that nearly every question reduces to the same four levers: who can contribute and how much, how the money is taxed going in, how it is taxed coming out, and when it must come out. Track those four levers per plan type and the chapter organizes itself.
What you'll cover
- IRAs: traditional versus Roth, conversions, rollovers versus transfers, and the 10% early-withdrawal penalty with its exceptions
- employer plans: qualified versus nonqualified, 401(k)/403(b)/457, SEP/SIMPLE/Keogh, defined benefit versus defined contribution, and ERISA coverage and vesting
- required minimum distributions under SECURE Act 2.0, and the triple-tax-advantaged HSA
529 plans and other municipal fund securities get their own chapter later in the course. This is the fourth chapter of the accounts module.
In this chapter
53 min · 13 concept checks
Section 1 of 3
~14 min · 3 concept checks
IRAs & IRA Distributions
Individual Retirement Accounts: Traditional vs. Roth
IRAs are the most frequently tested retirement accounts on the Series 7. The traditional vs. Roth distinction drives a huge number of questions — know every row of this comparison cold.
Traditional IRA
Pre-tax contributions (may be deductible)
Contribution limit (2024)
$7,000 ($8,000 if age 50+)
Deductibility
May be deductible depending on income and workplace plan coverage
Withdrawals
Taxed as ordinary income; 10% penalty if before age 59½
Required minimum distributions
Must begin at age 73 (SECURE Act 2.0)
Income limit to contribute
None — anyone with earned income can contribute
Roth IRA
After-tax contributions (never deductible)
Contribution limit (2024)
$7,000 ($8,000 if age 50+) — subject to income phase-out
Deductibility
Never deductible — contributions are always after-tax
Withdrawals
Qualified distributions are tax-free and penalty-free (age 59½ + 5-year holding period)
Required minimum distributions
None during the account owner's lifetime (major benefit)
Income limit to contribute
Phase-out begins at $146,000 (single) / $230,000 (married, 2024)
Roth IRA Conversions and ERISA Coverage
Roth IRA Conversion Tax Treatment
Converting a traditional IRA to a Roth is perfectly legal, and the price is paid all at once: the entire converted amount lands in ordinary income for the year of the conversion. Run the worked example below and notice what does NOT happen as carefully as what does:
Worked example: An IRA owner age 45 has contributed $10,000
total to a traditional IRA, all of which was deductible. The IRA is now worth
$20,000. The owner converts the entire balance to a Roth IRA.
Tax consequences:
Tax consequences:
- The full $20,000 is included in ordinary income for the conversion year.
- No capital gains treatment — even though the $10,000 of growth would have been LTCG outside an IRA.
- No 10% early withdrawal penalty on the conversion itself, even though the owner is under 59½. The penalty applies only to distributions from the IRA, not to a conversion that keeps the funds tax-deferred.
Roth withdrawal qualification: tax-free Roth distributions require two things at once: the owner is age 59½ or older, AND the Roth has been held at least 5 years, with the clock starting January 1 of the first tax year a contribution went into any Roth IRA. Both conditions, never either/or; the exam loves to offer one without the other.
ERISA Scope — Private Sector Only
The Employee Retirement Income Security Act of 1974 sets minimum standards for participation, vesting, funding, and fiduciary conduct in qualified plans. The exam rarely asks what ERISA requires; it asks which plans ERISA touches at all, so learn the two columns:
ERISA covers (private sector qualified)
- 401(k), 403(b), and other corporate qualified plans
- Defined benefit pension plans
- Profit-sharing plans
- Keogh plans for self-employed
- Welfare benefit plans (group health, life, disability)
ERISA does NOT cover
- Federal, state, and local government plans
- Section 457 plans (state/local government deferred comp)
- Church plans (unless they elect coverage)
- Nonqualified plans (deferred comp, payroll-deduction)
- Individual IRAs (the participant’s personal account, not the employer plan that funds it)
ERISA Vesting Rules
Your own contributions are always yours: employee money is immediately 100% vested. Employer money vests on one of two schedules:
- Cliff vesting: 100% vested after 3 years of service for defined contribution plans (5 years for defined benefit).
- Graded vesting: 20% per year vesting beginning in year 2, fully vested after 6 years for defined contribution plans (after 7 years for DB).
Rollovers vs. Direct Transfers
Moving money between retirement accounts without triggering taxes requires following specific rules. The two methods — rollover and direct transfer — have very different mechanics and consequences.
Indirect rollover (60-day rollover)
Funds pass through the account owner
Distribution is made to the account owner, who has 60 days to re-deposit into a new IRA
20% mandatory withholding applies to employer plan distributions (not IRAs)
Limited to once per 12-month period per IRA
If missed deadline: distribution is taxable + 10% early withdrawal penalty if under 59½
Direct transfer (trustee-to-trustee)
Funds move institution to institution
Funds move directly from one IRA/plan to another — account owner never touches the money
No withholding, no 60-day rule, no once-per-year limit
Preferred method — no risk of missing a deadline
Can be done unlimited times per year
Early Withdrawal: The 10% Penalty and Its Exceptions
Distributions from traditional IRAs and most employer plans before age 59½ are subject to a 10% early withdrawal penalty in addition to ordinary income tax. However, the IRS provides numerous exceptions — and several of them are tested on the Series 7.
All plans
IRA only
Employer plans only
Death or disability
All plans
72(t) substantially equal payments
All plans
Medical expenses > 7.5% AGI
All plans
First-time home purchase (≤$10K)
IRA only
Higher education expenses
IRA only
Separation from service at age 55+
Employer only
QDRO distributions (divorce)
Employer only
457(b) govt separation (any age)
No penalty ever
SECURE Act 2.0 key changes:
RMD age increased from 72 to 73 (and will increase to 75 in 2033).
Catch-up contribution limit for ages 60–63 increased to $10,000 for employer plans.
Roth employer plans no longer subject to RMDs during the owner's lifetime.
Concept Check
A 45-year-old customer has $50,000 in a traditional IRA and wants to use $10,000 for a down payment on her first home. She takes a distribution directly from the IRA. What are the tax consequences?
First-time home purchases qualify for a waiver of the 10% early withdrawal penalty (up to $10,000 lifetime from IRAs). However, the distribution is still taxable as ordinary income — the exception only eliminates the penalty, not the income tax. Traditional IRA distributions are always taxed as ordinary income since contributions were made pre-tax.
Concept Check
Which of the following best describes a direct trustee-to-trustee transfer of IRA assets compared to a 60-day indirect rollover?
Direct trustee-to-trustee transfers have no frequency limit and no withholding requirement because the account owner never receives the funds. The 60-day indirect rollover is limited to once per 12-month period across all IRAs, and employer plan distributions trigger 20% mandatory federal withholding (the owner must replace the withheld amount from other funds to avoid tax on the shortfall). The direct transfer is almost always the preferred method.
Concept Check
An IRA owner age 45 has contributed $10,000 of fully-deductible amounts into a traditional IRA, which is now worth $20,000. The owner converts the entire balance to a Roth IRA. What are the tax consequences of the conversion?
A Roth conversion recognizes the full converted amount as ordinary income in the conversion year because the entire $20,000 was funded with deductible pre-tax money. No portion qualifies for capital-gains treatment, even though $10,000 of the balance represents investment growth. The 10% early-withdrawal penalty does not apply to a conversion at any age — the penalty is triggered only by an actual distribution from the IRA. The conversion itself keeps the funds in tax-advantaged status, so the 10% penalty is irrelevant. Future qualified Roth withdrawals (after 59½ and 5 years) will be entirely tax-free.
Section 2 of 3
~24 min · 7 concept checks
Employer-Sponsored Plans
Employer-Sponsored Retirement Plans
Corporate / for-profit
Non-profit / government
Self-employed / small business
401(k)
For-profit corporations
Limit
$23,000 ($30,500 if 50+)
Match
Optional — common
Roth option available
403(b)
Non-profits, schools, hospitals
Limit
$23,000 ($30,500 if 50+)
Match
Optional — less common
Annuities / mutual funds
457(b)
State / local government
Limit
$23,000 ($30,500 if 50+)
Match
Rare
No 10% early penalty
SEP-IRA
Self-employed, small business
Limit
25% of comp, max $69,000
Match
Employer only — no employee contributions
Simple admin
SIMPLE IRA
Small biz ≤100 employees
Limit
$16,000 ($19,500 if 50+)
Match
Required: 3% match or 2% non-elective
2-yr rollover wait
Qualified vs. Nonqualified Plans: The Foundational Distinction
Every plan in this chapter falls on one side of a single line: does the tax code favor it or not? Qualified plans get the deductions and the deferral and accept ERISA's rules in exchange; nonqualified plans skip the rulebook and give up the tax treatment. Hold the two columns side by side:
Qualified Plans
Tax-favored, ERISA-regulated
Tax treatment
Contributions tax-deductible to the employer; pre-tax for the employee. Earnings tax-deferred. Withdrawals taxed as ordinary income.
Coverage requirement
Must be offered to eligible employees on a non-discriminatory basis under ERISA. Cannot favor highly compensated employees.
Examples
401(k), 403(b), defined benefit pension, profit-sharing, Keogh, SEP IRA, SIMPLE.
Nonqualified Plans
Selective, employer-funded, no ERISA
Tax treatment
Employer cannot deduct contributions until the employee constructively receives them. Earnings on plan assets are taxable to the employer.
Coverage
Can be offered selectively to highly compensated employees and executives. No nondiscrimination requirement.
Examples
Deferred compensation plans, payroll-deduction plans (FINRA-exam usage), Section 457 plans for state/local government.
Deferred compensation risk, general creditor: an employee in a deferred compensation plan is a general creditor of the employer. If the business fails before the deferred amount pays out, the employee waits in line with the other unsecured creditors. That single fact is the most-tested feature of nonqualified deferred comp.
FINRA exam terminology trap: on the Series 7, payroll-deduction plans are nonqualified, while salary-reduction plans like the 401(k) are qualified, even though the two mechanisms look identical from the paycheck. When you see "payroll deduction" in a question, the exam is signaling a nonqualified plan.
Employer-Sponsored Salary-Deferral Plans: 401(k), 403(b), 457
Three families of salary-deferral plans cover almost the whole employed workforce, and the exam tests them by employer type: tell it who the employer is and it expects you to name the plan.
401(k)
For-profit corporations
Salary-reduction agreement directs pre-tax contributions to the plan. Employer may match, profit-share, or both. Subject to ERISA. Investment options usually mutual funds, plus company stock for public employers.
403(b)
501(c)(3) nonprofits + public schools
Also called Tax-Sheltered Annuity (TSA). Mechanics similar to 401(k) but available only to employees of nonprofits and public education employers. Investments traditionally limited to annuities and mutual funds.
Section 457
State and local government
For state and local government employees plus certain tax-exempt organizations. Not subject to ERISA; treated as a deferred-compensation plan even though it functions like a salary-deferral plan.
Eligibility trap: a student cannot participate in their school's 403(b). The plan is for employees; teachers and administrators qualify, students do not, work-study or not.
Roth 401(k) Treatment
Many 401(k) plans let the employee designate contributions as Roth: after-tax money in, entirely tax-free qualified withdrawals out (after age 59½ and the 5-year holding period). A Roth 401(k) is not a separate IRA; it is a sub-account inside the employer plan, and since 2024 it shares the Roth IRA's exemption from lifetime RMDs (a SECURE Act 2.0 change, detailed below).
Required Beginning Date (RBD)
SECURE Act 2.0 (2022) update: The Required Beginning Date for
most retirement accounts is now April 1 of the year following the year
the participant turns age 73 (rising to age 75 in 2033). Prior law set
the RBD at age 70½ (changed to 72 in the original SECURE Act of 2019).
Roth IRAs have no RMDs during the original owner’s lifetime; Roth 401(k)
RMDs were eliminated by SECURE Act 2.0 starting in 2024.
Small-Business Retirement Plans: SEP, SIMPLE, Keogh
Three plans serve the self-employed and small employers, each calibrated to a different size and appetite for paperwork. The exam tests them the same way as the salary-deferral trio: match the employer in the question to the plan built for it.
SEP IRA
Simplified Employee Pension
Funded by employer only; no employee deferrals.
Contribution limit: lesser of 25% of compensation or the IRS dollar cap.
Best for self-employed or very small businesses with low administrative overhead.
SIMPLE
Savings Incentive Match Plan
Limited to employers with 100 or fewer employees.
Both employee deferrals (pre-tax) and mandatory employer match required (typically 3% match or 2% non-elective).
Catch-up contributions for age 50+ are permitted.
Keogh (HR-10)
Self-employed qualified plan
Qualified plan for sole proprietors, partnerships, and unincorporated businesses.
Can be structured as defined contribution or defined benefit.
Higher administrative burden than SEP or SIMPLE; suitable for higher-income self-employed who want larger contributions.
SIMPLE distractor trap: a favorite wrong answer reads "the employer cannot make matching contributions for employees." Read the plan's name again: Savings Incentive Match Plan. The employer match in a SIMPLE is mandatory, not prohibited, and the trap is betting you will misread "match" as optional.
Defined Benefit vs. Defined Contribution: Where Does the Risk Sit?
Employer-sponsored qualified plans take one of two shapes, and one question separates them: who eats the investment risk? In a defined benefit plan the employer promised a number, so the employer carries the risk of reaching it. In a defined contribution plan the only promise is the deposit, so the risk belongs to you, the participant.
Defined Benefit (DB) Plan
Employer bears investment risk
What is promised
A specific monthly retirement benefit, typically based on years of service and final average salary (e.g., 1.5% × years × final pay).
Funding
Employer contributions are mandatory and actuarially determined to fund the promised benefit. Underfunded plans require catch-up contributions.
Sex-blind funding
Unlike annuity payouts and life insurance, contributions to a DB plan are not affected by the participant’s sex.
Defined Contribution (DC) Plan
Employee bears investment risk
What is promised
Only the contribution amount; the eventual retirement balance depends on investment performance. Each participant has an individual account.
Funding
Money purchase pension plans require mandatory employer contributions. Profit-sharing and 401(k) plans permit but do not require employer contributions.
Examples
401(k), 403(b), profit-sharing, money purchase pension, SEP, SIMPLE, Keogh DC.
Pension plan vs. profit-sharing distinction: money purchase and defined benefit plans are pension plans, which means employer contributions are mandatory. Profit-sharing and 401(k) plans are defined contribution but NOT pension plans, so employer contributions are discretionary. The Series 7 tests exactly this nuance.
Concept Check
A 60-year-old employee separates from service at a company where she has accumulated $200,000 in a 401(k) plan. She withdraws the full balance immediately. Is the 10% early withdrawal penalty applicable?
The "separation from service at age 55 or older" exception waives the 10% early withdrawal penalty for employer plan distributions (401k, 403b, 457). This exception is available to employees who separate from service during or after the year in which they turn 55. Importantly, this exception applies to employer plans ONLY — it does not apply to IRA distributions.
Concept Check
An employee participates in a SIMPLE IRA through her employer. After 18 months of participation, she leaves the company and wants to roll her SIMPLE IRA balance into a traditional IRA. What is the tax consequence?
SIMPLE IRA participants must wait two years from the date of first participation before rolling funds into a non-SIMPLE account (a traditional IRA or employer plan). If a distribution or rollover to a non-SIMPLE account is made within the first two years, the additional tax is 25% rather than the standard 10%. After the 2-year period, SIMPLE IRA funds can be rolled to any eligible retirement account.
Concept Check
A self-employed consultant earns $120,000 in net self-employment income. She wants to maximize her retirement contribution using a SEP-IRA. What is the maximum she can contribute in 2024?
SEP-IRA contributions are calculated as 25% of compensation, but for self-employed individuals the calculation is slightly different because the contribution itself reduces net earnings. The effective rate works out to approximately 20% of net self-employment income (after the self-employment tax deduction). On $120,000 net income, this yields roughly $27,600. The absolute maximum for 2024 is $69,000. The $7,000 limit applies to traditional and Roth IRAs but not to SEP-IRAs.
Concept Check
A businessman owns a small incorporated manufacturing company. He is comfortable with equity-market risk, wants to save for retirement, and wants to provide a plan in which employees can also contribute pre-tax to save for their own retirements. Which option best meets these objectives?
A 401(k) plan fits all three criteria. The owner’s incorporated manufacturing company is a for-profit corporation — the typical 401(k) sponsor. Employees can contribute pre-tax through salary deferral, which matches the customer’s explicit goal. The plan offers equity investment options consistent with the owner’s risk tolerance. A 403(b) is restricted to nonprofit and public-school employers and would not be available to a manufacturing company. A traditional IRA is an individual account, not an employer-sponsored plan that allows employee participation. A 529 plan is for education savings, not retirement.
Concept Check
Of the following plans, which would be subject to ERISA?
ERISA applies to private-sector qualified retirement plans, including the defined benefit plan offered by the manufacturing company. Government plans (city of Detroit, state employees under Section 457) are exempt because ERISA covers only private-sector plans. Nonqualified plans — including the deferred compensation plan offered to select executives — are also exempt because they are not subject to ERISA’s nondiscrimination rules. The qualifying combination is private sector plus qualified plan; either public sector or nonqualified status excludes a plan from ERISA coverage.
Concept Check
Which of the following statements regarding Savings Incentive Match Plans for Employees (SIMPLEs) is NOT true?
The not-true statement is that employers cannot match. The mandatory employer match is the defining feature of a SIMPLE plan — typically either a 3% dollar-for-dollar match on employee deferrals or a 2% non-elective contribution made on behalf of all eligible employees. The other three statements are accurate: SIMPLEs are limited to employers with 100 or fewer employees, catch-up contributions for age 50+ are permitted, and employee deferrals reduce taxable wages just like 401(k) deferrals. The "match" in the plan name is the giveaway — a plan called a Match Plan with a prohibited match would not exist.
Concept Check
A customer asks about the principal risk of participating in an employer’s nonqualified deferred compensation plan. The most accurate answer is that
In a nonqualified deferred compensation plan, the employer’s promise to pay deferred amounts at a future date is unsecured. The employee is a general creditor of the employer, ranking with other unsecured creditors if the business fails. This counterparty risk is the defining feature of deferred comp and the principal reason employees should evaluate the employer’s financial strength carefully. Deferral periods are typically long, not short. The plan benefits older highly-compensated employees — not younger ones. Board membership does not preclude participation; executives are common participants in deferred comp plans.
Section 3 of 3
~7 min · 3 concept checks
RMDs & Other Tax-Advantaged
Required Minimum Distributions (RMDs): The Key Rules
RMDs are the government finally collecting: mandatory annual distributions from traditional IRAs and employer-sponsored plans. SECURE Act 2.0 rewrote the numbers, so make sure the figures you memorize are these:
RMD start age: 73 (increased from 72 by SECURE Act 2.0; increases to 75 in 2033)
Roth IRAs: no RMDs during the owner's lifetime. Beneficiaries do have RMD obligations.
Roth 401(k): beginning in 2024, Roth employer plan accounts are also RMD-exempt during the owner's lifetime (SECURE Act 2.0 change).
Penalty for failure: a 25% excise tax on the amount that should have been distributed (reduced from 50% by SECURE Act 2.0), dropping to 10% if corrected within two years.
Spousal inheritance: a surviving spouse is the only beneficiary who can roll an inherited IRA into their own IRA and defer RMDs to their own RMD age.
RMDs are the government finally collecting: mandatory annual distributions from traditional IRAs and employer-sponsored plans. SECURE Act 2.0 rewrote the numbers, so make sure the figures you memorize are these:
RMD start age: 73 (increased from 72 by SECURE Act 2.0; increases to 75 in 2033)
Roth IRAs: no RMDs during the owner's lifetime. Beneficiaries do have RMD obligations.
Roth 401(k): beginning in 2024, Roth employer plan accounts are also RMD-exempt during the owner's lifetime (SECURE Act 2.0 change).
Penalty for failure: a 25% excise tax on the amount that should have been distributed (reduced from 50% by SECURE Act 2.0), dropping to 10% if corrected within two years.
Spousal inheritance: a surviving spouse is the only beneficiary who can roll an inherited IRA into their own IRA and defer RMDs to their own RMD age.
Health Savings Accounts (HSA)
An HSA is not a retirement account, but it keeps walking into retirement questions because nothing else in the tax code gets all three advantages at once. It pairs with a high-deductible health plan (HDHP), and the three cards below are the whole pitch:
Contributions
Tax-deductible
Pre-tax through payroll or above-the-line deduction on personal taxes. Contributions reduce AGI dollar-for-dollar.
Earnings
Tax-deferred
Investment growth inside the HSA is not taxed annually. Many HSAs offer mutual fund investment options once the account exceeds a threshold balance.
Qualified withdrawals
Tax-free
Withdrawals for qualified medical expenses are entirely tax-free. After age 65, withdrawals for any purpose are taxed only as ordinary income (no penalty), making the HSA function like a traditional IRA for non-medical use.
Eligibility requirement: HSA contributions are allowed only while the holder is enrolled in a high-deductible health plan and not covered by other non-HDHP insurance. Medicare enrollment ends new contributions, though the existing balance stays available for qualified expenses.
Concept Check
Which of the following retirement plans does NOT require the account owner to take required minimum distributions (RMDs) during their lifetime?
The Roth IRA is unique in that it has no RMD requirement during the account owner's lifetime. All other listed plans — traditional IRAs, SEP-IRAs, and 401(k)s — require distributions beginning at age 73 (per SECURE Act 2.0). This makes the Roth IRA attractive for estate planning since assets can continue to grow tax-free. Note that Roth 401(k)s also became RMD-exempt starting in 2024.
Concept Check
Under SECURE Act 2.0, the required beginning date for taking required minimum distributions from most traditional retirement accounts is generally
SECURE Act 2.0 (enacted in 2022) raised the required beginning date from age 72 to age 73 effective for individuals reaching that age in 2023 and later. The RBD is April 1 of the year <em>following</em> the year the participant turns 73, not April 1 of the year they turn 73. The age 70½ figure was the original SECURE Act 2019 baseline, raised to 72 by that act and then to 73 by SECURE Act 2.0. A future increase to age 75 takes effect in 2033. Roth IRAs continue to have no required minimum distributions during the original owner’s lifetime.
Concept Check
A health savings account (HSA) provides which of the following tax benefits when used for qualified medical expenses?
An HSA offers a triple tax advantage when paired with a high-deductible health plan: contributions are tax-deductible (or pre-tax through payroll), earnings grow tax-deferred inside the account, and qualified withdrawals for medical expenses are entirely tax-free. This combination is unique among tax-advantaged accounts — traditional IRAs lack the tax-free withdrawal leg, and Roth IRAs lack the deductible-contribution leg. After age 65, HSAs become even more flexible: non-medical withdrawals are taxed as ordinary income with no 20% penalty, mirroring traditional IRA mechanics.
Summary
Exam Essentials — high-yield review
Chapter Summary
Ch 6 Exam Essentials — Retirement Plans and Tax-Advantaged Accounts
- IRA contribution limit (2024): $7,000; $8,000 if age 50+. Traditional: may be deductible. Roth: never deductible, income phase-outs apply. Deadline: tax filing deadline (April 15).
- RMD age: 73 (SECURE Act 2.0). Roth IRA — NO RMDs during owner's lifetime. Roth 401(k) — also RMD-exempt starting 2024. Penalty for missed RMD: 25% excise tax (drops to 10% if corrected in 2 years).
- 10% early withdrawal exceptions: Death/disability (all plans); 72(t) SEPP (all plans); first-home purchase up to $10,000 (IRA only); separation from service at 55+ (employer plans only, NOT IRAs); 457(b) has no 10% penalty ever.
- SIMPLE IRA 2-year rule: Within first 2 years of participation, rollover is only to another SIMPLE IRA. Violation triggers 25% penalty (not 10%). After 2 years, rolls freely.
- Direct transfer vs. rollover: Direct (trustee-to-trustee) = no limit, no withholding. Indirect (60-day) = once per 12-month period across all IRAs; employer plan distributions trigger 20% mandatory withholding.
The Three Exam Traps on Retirement Plans
Trap 1: Roth IRA has no RMDs. Traditional IRAs, SEP-IRAs, SIMPLE IRAs, 401(k)s, and 403(b)s all require RMDs starting at age 73. Roth IRAs never do during the owner's lifetime. When a question asks which plan has no RMD requirement, the answer is the Roth IRA.
Trap 2: the 60-day rollover limit is one per person per 12 months, across all IRAs. A person with three IRAs gets one 60-day indirect rollover per 12-month period total, not one per account. Trustee-to-trustee transfers have no limit, which is why a direct transfer is almost always the better recommendation.
Trap 3: the SIMPLE IRA 2-year rule. During the first two years of participation, SIMPLE IRA money can be rolled only to another SIMPLE IRA, not to a traditional IRA or another employer plan. Break the rule and the penalty is 25%, not 10%.
Trap 1: Roth IRA has no RMDs. Traditional IRAs, SEP-IRAs, SIMPLE IRAs, 401(k)s, and 403(b)s all require RMDs starting at age 73. Roth IRAs never do during the owner's lifetime. When a question asks which plan has no RMD requirement, the answer is the Roth IRA.
Trap 2: the 60-day rollover limit is one per person per 12 months, across all IRAs. A person with three IRAs gets one 60-day indirect rollover per 12-month period total, not one per account. Trustee-to-trustee transfers have no limit, which is why a direct transfer is almost always the better recommendation.
Trap 3: the SIMPLE IRA 2-year rule. During the first two years of participation, SIMPLE IRA money can be rolled only to another SIMPLE IRA, not to a traditional IRA or another employer plan. Break the rule and the penalty is 25%, not 10%.
Retirement Plan Exam Traps — Consolidated
The Series 7 returns to a small set of distinctions in the retirement chapter. If a question feels familiar, it is probably testing one of these:
1. Deferred comp = general creditor risk. Employees in a nonqualified deferred compensation plan are unsecured general creditors of the employer. If the business fails, they wait in line behind secured creditors.
2. Roth conversion = full ordinary income, no early-withdrawal penalty. Converting a traditional IRA to a Roth recognizes the entire converted amount as ordinary income in the conversion year. Capital gains rates do not apply. The 10% early-withdrawal penalty applies only to actual distributions, not to conversions.
3. ERISA = private sector only. ERISA does not cover federal, state, or local government plans. Section 457 plans, government pensions, and nonqualified plans are outside ERISA.
4. SIMPLE has mandatory employer match. The "match" in Savings Incentive Match Plan is required, not optional. The exam tests this with a "which is NOT true" framing claiming employer cannot match.
5. Money purchase + DB = mandatory contributions; profit-sharing + 401(k) = discretionary. The pension/non-pension distinction matters for whether the employer is locked into annual contributions.
6. DB contributions are sex-blind. Unlike annuity payouts and life insurance premiums, defined benefit contributions are not affected by the participant’s sex.
7. 403(b) plans for employees only. A student is not eligible for an educational institution’s 403(b), regardless of work-study or campus employment.
8. RBD = April 1 of year following age 73. SECURE Act 2.0 moved the threshold from 70½ to 72 to 73 (with a future move to 75 in 2033). Roth IRAs have no lifetime RMDs; Roth 401(k) RMDs eliminated starting 2024.
9. IRA contributions due by April 15 deadline. Tax filing extensions do not extend the IRA contribution deadline. April 15 without exception (April 17-18 in years when the 15th falls on a weekend or holiday).
10. Tax-exempt muni interest does not count toward AGI. Even though it appears on Form 1040, it is excluded from AGI for purposes of computing IRA deduction phase-outs and Roth eligibility limits.
11. Roth distribution requires age 59½ AND 5 years. Both conditions, not either. The 5-year clock runs from January 1 of the year the first contribution was made to any Roth IRA owned by the person.
12. HSA = triple tax advantage. Contributions deductible, earnings tax-deferred, qualified medical withdrawals tax-free. After age 65, HSA functions like a traditional IRA for non-medical withdrawals.
13. Catch-up contributions = age 50+. Available in IRAs, 401(k), 403(b), 457, and SIMPLE plans. EGTRRA (2001) introduced the catch-up provision across plan types.
14. Ineligible IRA investments: collectibles, life insurance. IRA cannot hold whole or term life insurance, art, antiques, gems, or most collectibles. U.S. minted gold and silver coins are permitted exceptions.
15. Death always permitted as 10%-penalty exception. Death of the IRA owner waives the early-withdrawal penalty for beneficiaries, regardless of their age or the original owner’s age.
The Series 7 returns to a small set of distinctions in the retirement chapter. If a question feels familiar, it is probably testing one of these:
1. Deferred comp = general creditor risk. Employees in a nonqualified deferred compensation plan are unsecured general creditors of the employer. If the business fails, they wait in line behind secured creditors.
2. Roth conversion = full ordinary income, no early-withdrawal penalty. Converting a traditional IRA to a Roth recognizes the entire converted amount as ordinary income in the conversion year. Capital gains rates do not apply. The 10% early-withdrawal penalty applies only to actual distributions, not to conversions.
3. ERISA = private sector only. ERISA does not cover federal, state, or local government plans. Section 457 plans, government pensions, and nonqualified plans are outside ERISA.
4. SIMPLE has mandatory employer match. The "match" in Savings Incentive Match Plan is required, not optional. The exam tests this with a "which is NOT true" framing claiming employer cannot match.
5. Money purchase + DB = mandatory contributions; profit-sharing + 401(k) = discretionary. The pension/non-pension distinction matters for whether the employer is locked into annual contributions.
6. DB contributions are sex-blind. Unlike annuity payouts and life insurance premiums, defined benefit contributions are not affected by the participant’s sex.
7. 403(b) plans for employees only. A student is not eligible for an educational institution’s 403(b), regardless of work-study or campus employment.
8. RBD = April 1 of year following age 73. SECURE Act 2.0 moved the threshold from 70½ to 72 to 73 (with a future move to 75 in 2033). Roth IRAs have no lifetime RMDs; Roth 401(k) RMDs eliminated starting 2024.
9. IRA contributions due by April 15 deadline. Tax filing extensions do not extend the IRA contribution deadline. April 15 without exception (April 17-18 in years when the 15th falls on a weekend or holiday).
10. Tax-exempt muni interest does not count toward AGI. Even though it appears on Form 1040, it is excluded from AGI for purposes of computing IRA deduction phase-outs and Roth eligibility limits.
11. Roth distribution requires age 59½ AND 5 years. Both conditions, not either. The 5-year clock runs from January 1 of the year the first contribution was made to any Roth IRA owned by the person.
12. HSA = triple tax advantage. Contributions deductible, earnings tax-deferred, qualified medical withdrawals tax-free. After age 65, HSA functions like a traditional IRA for non-medical withdrawals.
13. Catch-up contributions = age 50+. Available in IRAs, 401(k), 403(b), 457, and SIMPLE plans. EGTRRA (2001) introduced the catch-up provision across plan types.
14. Ineligible IRA investments: collectibles, life insurance. IRA cannot hold whole or term life insurance, art, antiques, gems, or most collectibles. U.S. minted gold and silver coins are permitted exceptions.
15. Death always permitted as 10%-penalty exception. Death of the IRA owner waives the early-withdrawal penalty for beneficiaries, regardless of their age or the original owner’s age.
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