Section 10.1: Individual Retirement Accounts (IRAs)

🏦 Purpose and Background
- Created by: The Employee Retirement Income Security Act (ERISA) of 1974.
- Purpose: To encourage individuals to save for retirement.
- Type: IRAs are not employer-sponsored and not qualified plans, but they share many similar rules.

Who can open an IRA: Any employed individual with earned income.
- Earned income = salary, wages, tips, commissions, etc.
Deadline for contributions:
- Can be made until April 15th of the following year.
Contribution limits:
- Cannot exceed the annual IRS maximum (adjusted periodically).
- Individuals age 50+ can contribute an extra $1,000 “catch-up” contribution.
- Married couples may base contributions on combined earned income (spousal IRA allowed).
- Contributions above the limit face a 6% penalty each year until removed.
Tax-deferred growth: Earnings inside an IRA grow tax-deferred until withdrawn.

Allowed investments:.
- Stocks, Bonds, Mutual Funds, Unit Investment Trusts (UITs)
- U.S. Government securities
- U.S. Government-issued gold & silver coins
- Writing of covered calls
Prohibited investments:
- Short sales of stock
- Speculative option strategies
- Tax-exempt municipal bonds
- Margin trading

Transfers:
- From one IRA to another of the same type (Traditional → Traditional or Roth → Roth).
- Unlimited number of transfers allowed.
- Called custodian-to-custodian transfers.
Rollover:
- When the account owner takes possession of funds and re-deposits them within 60 days.
- One rollover per person per 12 months.
- Must redeposit within 60 calendar days (not 2 months).
- If done correctly → no tax penalty.
Direct rollover:
- Moving money directly from an employer plan (e.g., 401k) to an IRA.
- Often called a “direct rollover,” but technically a transfer since funds never touch the client’s hands.

If NOT covered by an employer-sponsored qualified plan → full deduction allowed (regardless of income).
If covered by an employer plan → deductibility depends on income level.
- IRS sets income phase-out ranges:
  - Below the range → full deduction
  - Within range → partial deduction
  - Above range → no deduction
- These ranges adjust for inflation each year.

IRAs

Penalty-free withdrawals:
- After age 59½.
- Taxed as ordinary income.
Early withdrawals (before 59½):
- 10% penalty + income tax, unless an exception applies.

Begin the year the account holder turns 73.
Must be taken by December 31 each year.
First RMD may be delayed until April 1 of the following year (but then two distributions that year).
Based on account value from the end of the prior year.
If multiple IRAs exist → total RMD can be taken from any one or a combination.
Penalty: 25% of the amount that should have been withdrawn but wasn’t.

Created by: The Taxpayer Relief Act of 1997, named after Senator William Roth.
Contribution rules:
- Same limits as Traditional IRAs (combined cap across all IRAs).
- Contributions are NOT tax deductible.
Distribution rules:
- Qualified withdrawals (no tax or penalty) if:
  1. Account held at least 5 years, and
  2. Owner is 59½ or older, or
  3. Withdrawal is due to death, disability, or first-time home purchase (up to $10,000).
- Non-qualified withdrawals of earnings → taxed as ordinary income + 10% penalty.
- Contributions (principal) can always be withdrawn tax-free (return of cost basis).
No RMDs during the account holder’s lifetime.
Best suited for:
- Younger investors with long time horizons.
- Lower-income earners who gain little benefit from a current deduction.

Once per 12-month period.
Age 73.
25% of the amount not withdrawn.
No, Roth contributions are made with after-tax money.
Held for at least 5 years and the owner is 59½+, or due to death, disability, or first-time home purchase (up to $10,000).
No, Roth IRAs have no RMD requirement during the owner’s lifetime.