10.3 Traditional vs. Roth IRAs
Comparing Traditional and Roth IRAs is tested across multiple exam scenarios. The core decision hinges on whether the client expects their tax bracket to be higher or lower in retirement.
Key FINRA Exam Takeaways
- Traditional IRA: Pre-tax contributions (if income under phase-out), tax-deferred growth, distributions taxed as ordinary income, Required Minimum Distributions (RMDs) start at age 73 (SECURE 2.0).
- Roth IRA: Funded with AFTER-TAX dollars, tax-free growth, qualified distributions are 100% TAX-FREE, NO lifetime RMDs.
- Qualified Roth Distribution: Must meet BOTH: 1. Account open at least 5 years; AND 2. Age 59½, death, or disability (or $10,000 first-time homebuyer).
- High-income earners cannot contribute directly to Roth IRAs due to MAGI phase-out limits.
| Attribute | Traditional IRA | Roth IRA |
|---|---|---|
| Contributions | Pre-tax (Tax deductible if eligible) | After-tax (Non-deductible) |
| Earnings Growth | Tax-deferred | Tax-FREE |
| Distributions | 100% taxable as ordinary income | 100% TAX-FREE (if qualified) |
| Income Eligibility Limits | Anyone with earned income can contribute | Phased out at high MAGI levels |
| Required Minimum Distributions | RMDs mandatory starting at age 73 | NO lifetime RMDs |
Interactive Knowledge Checkpoint • Section 10.3
A 32-year-old investor in a low tax bracket expects their income and tax rate to increase significantly later in their career. Which retirement vehicle is MOST suitable for their current annual savings?