Retirement and Education Accounts
About This Lesson
Registered representatives help clients open and manage retirement and education accounts constantly, so the SIE tests them in detail. Each account type carries its own contribution limits, eligibility rules, and tax treatment, and the exam loves to ask which one fits a given situation and how the withdrawals are taxed.
What you'll cover
- Traditional vs. Roth IRAs: deductibility, growth, and distribution rules
- Employer plans, 401(k), 403(b), and 457, and which employer each one goes with
- SEP and SIMPLE IRAs for small businesses and the self-employed
- Required minimum distributions, rollovers, and the 60-day rule
- Coverdell ESAs, 529 plans, and ABLE accounts for education and disability savings
Two distinctions are tested almost every form: Traditional (deduct now, pay tax later) versus Roth (no deduction now, tax-free later), and the 60-day rollover deadline, which turns into a taxable distribution if it is missed.
Individual Retirement Accounts
An IRA is a tax-advantaged account an individual opens on their own, and the two flavors differ mainly in when you get the tax break.
Traditional IRA
- Contributions may be tax-deductible, depending on your income and whether you are covered by an employer plan.
- Growth is tax-deferred, so you owe nothing on the gains until you withdraw.
- Withdrawals are taxed as ordinary income, and taking money out before age 59½ adds a 10% penalty (with exceptions).
- Required minimum distributions must begin at age 73.
Roth IRA
- Contributions are made with after-tax dollars, so they are never deductible.
- Qualified withdrawals are completely tax-free and penalty-free, as long as the account has been open at least five years and the owner is 59½ or older.
- Your contributions (but not the earnings) can be withdrawn at any time, tax- and penalty-free.
- There are no required minimum distributions during the owner's lifetime, and high earners may be phased out of contributing directly.
Both types share the same annual contribution limit. For 2026 that is $7,500, or $8,600 if you are 50 or older (a $1,100 catch-up). These figures are indexed and adjust most years.
Traditional IRA: Tax break NOW (deductible contributions), pay taxes LATER (taxable withdrawals).
Roth IRA: No tax break now (after-tax contributions), tax-free LATER (qualified withdrawals).
Think of it as: Traditional = "tax-deferred." Roth = "tax-free growth."
Which of the following is a key advantage of a Roth IRA over a Traditional IRA?
Employer and Small-Business Plans
A qualified plan is an employer-sponsored plan that meets IRS and ERISA requirements and earns special tax treatment: contributions reduce taxable income and growth is tax-deferred. Three plan types come up, and the exam keys on which employer offers each.
401(k) plans
- Offered by for-profit corporations.
- The employee defers part of their salary pre-tax, and the employer may match.
- For 2026, the employee deferral limit is $24,500 (or $32,500 at age 50 and up). Withdrawals are taxed as ordinary income, with the 10% early-withdrawal penalty before 59½.
- A Roth 401(k) option takes after-tax contributions for tax-free qualified withdrawals.
403(b) plans
- For public schools, hospitals, and 501(c)(3) nonprofits.
- Similar structure and limits to a 401(k), with investments usually limited to mutual funds and annuities.
457 plans
- For state and local government employees.
- Their standout feature: no 10% early-withdrawal penalty. An eligible employee can even contribute to both a 457 and a 403(b).
Small businesses and the self-employed use two simpler plans that skip much of a 401(k)'s administrative load.
SEP-IRA
- Funded by the employer only, who contributes to each eligible employee's SEP-IRA.
- It allows much larger contributions than a regular IRA, up to 25% of compensation, and is popular with the self-employed because it is easy to set up.
SIMPLE IRA
- For businesses with 100 or fewer employees.
- Both the employer and the employee contribute. The employer must either match contributions (up to 3%) or make a 2% non-elective contribution for all eligible employees.
- Contribution limits are lower than a 401(k), but it is simpler to run.
401(k) → For-profit corporations
403(b) → Public schools, hospitals, nonprofits
457 → State/local government (no early withdrawal penalty!)
SEP-IRA → Small business / self-employed (employer contributions only)
SIMPLE IRA → Small businesses with ≤100 employees
A 403(b) retirement plan is available to employees of:
Which retirement plan type has NO 10% early withdrawal penalty?
Distributions, RMDs, and Rollovers
Tax-deferred accounts cannot grow untaxed forever. Required minimum distributions (RMDs) force withdrawals to begin at age 73 (raised by the SECURE 2.0 Act), and missing one triggers a steep 25% excise tax on the amount you should have taken.
- Traditional IRA and 401(k), 403(b), and 457 plans all require RMDs starting at age 73 (a workplace plan may let you delay while you are still employed there).
- Roth IRAs have no RMDs during the owner's lifetime, and SECURE 2.0 removed the lifetime RMD that Roth 401(k)s used to carry.
- Inherited IRAs generally must be emptied within 10 years by a non-spouse beneficiary.
Moving money from one retirement account to another can be done two ways, and the difference matters because one of them starts a 60-day clock.
- Direct rollover (trustee-to-trustee): the funds move straight from one custodian to another and never touch your hands, with no tax consequences. This is the preferred method.
- Indirect (60-day) rollover: you receive the funds and have 60 days to redeposit them into another qualified account. Miss the deadline and the whole amount becomes a taxable distribution, plus the 10% penalty if you are under 59½.
- 20% withholding: on an indirect rollover from an employer plan, the firm withholds 20% for taxes, so you have to make up that 20% out of pocket to roll over the full balance.
- Traditional IRA: Tax deduction now, taxed at withdrawal. Best if your tax rate will be lower in retirement.
- Roth IRA: No deduction now, tax-free withdrawals. Best if your tax rate will be higher in retirement.
- Roth contributions can be withdrawn anytime tax-free and penalty-free. Only earnings have age/time restrictions.
- Traditional IRAs require RMDs at 73; Roth IRAs have no RMDs during the owner's lifetime.
An investor takes a distribution from a Traditional IRA at age 45. What are the tax consequences?
Education and Disability Accounts
Two account types target education savings, and a third helps people with disabilities save without losing benefits.
Coverdell Education Savings Accounts (ESAs)
- Growth is tax-free when used for qualified education expenses, covering both K-12 and higher education.
- The annual contribution limit is $2,000 per beneficiary, and income limits apply to contributors.
- The funds must be used by the time the beneficiary turns 30, or rolled over to another family member.
529 plans
Covered in more detail in the Products section, 529 plans also offer tax-free growth for qualified education expenses, but with much higher contribution limits than a Coverdell and no income limits on contributors. Since 2024, unused 529 funds can be rolled into a Roth IRA for the beneficiary, subject to conditions and lifetime limits.
ABLE accounts
ABLE (Achieving a Better Life Experience) accounts let people with a qualifying disability save without jeopardizing benefits like SSI. As of 2026, eligibility covers anyone whose disability began before age 46 (raised from 26 under the SECURE 2.0 Act). Like a 529, growth is tax-free for qualified disability expenses such as housing, education, transportation, and health care, and balances up to $100,000 are disregarded for SSI purposes.
Chapter Essentials
The core split is Traditional (contributions may be deductible now, withdrawals taxed as ordinary income later) versus Roth (after-tax contributions now, tax-free qualified withdrawals later, and no lifetime RMDs). A 10% penalty applies to withdrawals before age 59½ unless an exception fits, and RMDs begin at age 73 for everything except Roth IRAs. On the employer side, match the plan to the employer: 401(k) for for-profits, 403(b) for schools, hospitals, and nonprofits, 457 for state and local government (its perk is no early-withdrawal penalty), and SEP or SIMPLE IRAs for small businesses.
For rollovers, a direct trustee-to-trustee transfer is clean, while an indirect rollover starts a 60-day clock and carries 20% withholding from employer plans; miss the 60 days and it becomes a taxable distribution. For education and disability, a Coverdell caps at $2,000 a year, a 529 allows much more with no income limits, and an ABLE account (now open to a disability onset before age 46) shelters up to $100,000 without affecting SSI.
The reliable gotchas in this chapter:
• Roth gives no deduction now, tax-free later. Traditional is the reverse. The trade is always about when you pay tax, and only the Roth lets you withdraw your contributions (not earnings) at any time.
• Match the plan to the employer. 401(k) is for-profit, 403(b) is schools, hospitals, and 501(c)(3) nonprofits, 457 is state and local government. The 457 is the one with no 10% early-withdrawal penalty.
• The 60-day rollover is a trap. Miss the deadline on an indirect rollover and the money is a taxable distribution (plus 10% if under 59½). A direct trustee-to-trustee transfer avoids the clock and the 20% withholding entirely.
• RMDs start at 73, but never for a Roth IRA. Skipping a required distribution costs a 25% excise tax on the shortfall. Roth IRAs have no lifetime RMDs at all.
• Coverdell is capped at $2,000 a year. A 529 allows far more with no income limits on contributors, which is why it is the workhorse for larger college savings.
• SEP is employer-funded; SIMPLE is for small shops. A SEP-IRA takes employer contributions only, while a SIMPLE IRA fits businesses with 100 or fewer employees and takes both employer and employee money.