Traditional IRA vs. Roth IRA: Contributions, Deductibility, and Tax Penalties
A 45-year-old single executive earns an annual salary of $250,000 and participates in an employer-sponsored 401(k) plan. The executive wishes to save additional funds for retirement. Which statement accurately describes the executive's IRA contribution options?
High earners covered by workplace plans cannot deduct Traditional IRA contributions and cannot contribute directly to Roth IRAs, but can make non-deductible Traditional IRA contributions.
Complete Analysis & Legal Rationale
Because the executive earns $250,000: (1) Their income exceeds the statutory Modified Adjusted Gross Income (MAGI) phaseout ceiling for direct Roth IRA contributions; (2) Because they actively participate in an employer-sponsored retirement plan (401k) and earn well above the single filer deduction phaseout range, Traditional IRA contributions are non-deductible; (3) However, any individual with earned income can always make a non-deductible contribution to a Traditional IRA up to the annual statutory limit (growth accumulates tax-deferred).
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
Active participation in a 401(k) eliminates deductibility of Traditional IRA contributions at this high income level.
High income prevents Roth contributions and Traditional deductions, leaving non-deductible Traditional IRA contributions.
There is no income cap for making non-deductible Traditional IRA contributions as long as the person has earned income.
IRA annual limits are far lower (e.g., $7,000 in 2024/2025), and Roth direct contributions are phased out at high incomes.
Official Standard: Sets rules on active participant deduction limits and Roth IRA income phaseout thresholds.