9.2 Individual Retirement Accounts
Individual Retirement Accounts enable individuals with earned income to save for retirement outside employer-sponsored plans.
Key NASAA Exam Takeaways
- Traditional IRA: Pre-tax or after-tax contributions; earnings grow tax-deferred; distributions are taxed as ordinary income; Required Minimum Distributions (RMDs) begin at age 73.
- Roth IRA: Contributions are strictly after-tax; qualified distributions (held 5+ years and age 59 1/2+) are 100% federal income-tax-free; no RMDs during owner lifetime.
- 60-Day Rollover Rule: Investors may conduct one indirect IRA rollover per 12-month rolling period, returning funds within 60 calendar days.
- Direct Trustee-to-Trustee transfers have no limits and carry no mandatory withholding tax.
| Attribute | Traditional IRA | Roth IRA |
|---|---|---|
| Contributions | Pre-tax (if eligible) or After-tax | Strictly After-tax (subject to AGI phase-outs) |
| Earnings Growth | Tax-deferred | 100% Tax-free |
| Distributions | Taxed as ordinary income | Tax-free if qualified (5 yrs + age 59.5) |
| RMDs | Mandatory beginning at age 73 | None during original owner lifetime |
| Early Withdrawal (pre-59.5) | Ordinary income + 10% penalty (exceptions apply) | Principal withdrawn tax/penalty free anytime |
Knowledge Checkpoint • Section 9.2
A 40-year-old investor opened a Roth IRA 3 years ago, contributing $18,000 in total. The account value has grown to $24,000. If the investor withdraws $10,000 to purchase a car, what are the tax and penalty consequences?