Retirement Plans, IRAs & Distributions (2025)

Traditional IRA

Taxation: Contributions tax-deferred. Distributions taxed as ordinary income.

Deductibility: If NEITHER you NOR spouse is covered by a workplace plan → fully deductible regardless of income. If covered, phases out:

Partial deduction formula: Deduction = Max − RoundUp( Max × (MAGI − Start) ÷ Range, $10 ). Minimum $200 if result > $0.

Non-deductible contributions allowed → must file Form 8606 to track basis. Earnings still grow tax-deferred.

6% excess-contribution excise tax: If you contribute more than allowed (or more than compensation), the excess is subject to 6% tax each year it remains in the account. Correct by withdrawing excess + earnings by the return due date (incl. extension) → no 6% tax (but earnings are taxable in the contribution year). If not withdrawn, 6% applies annually, capped at 6% of account value at year-end.

Roth IRA

Contributions NOT deductible. Qualified distributions TAX-FREE (must be at least 59½, disabled, first-time homebuyer up to $10K, or held 5+ years).

Contribution phaseout based on MAGI:

No RMDs during owner's lifetime.

SEP-IRA (Simplified Employee Pension)

Employer-funded. Contribution limit: lesser of 25% of compensation or $70,000 (2025). Self-employed: effectively 20% of net SE income (after SE tax deduction).

SIMPLE IRA

Employee salary deferral: $16,500 (catch-up 50+: $3,500). Employer: 3% match or 2% non-elective contribution.

401(k) / 403(b) / 457 Plans

Early Distribution Penalty (10%)

Applies to distributions before age 59½. Exceptions:

• Death
• Total and permanent disability
• Substantially equal periodic payments (SEPP)
• Medical expenses >7.5% AGI
• Health insurance premiums while unemployed (72 weeks+)
• Higher education expenses
• First-time home purchase ($10,000 lifetime)
• IRS levy
• Qualified reservist distributions
• Qualified disaster distributions (QDDs) — repayable within 3 years
• Birth or adoption ($5,000 per child)
• Terminally ill distributions (SECURE 2.0)
• Emergency personal expense distribution — lesser of $1,000 or account balance − $1,000; repayable within 3 years (SECURE 2.0)
• Domestic violence victim distribution — lesser of $10,000 or 50% of account balance; repayable within 3 years (SECURE 2.0)

Qualified Charitable Distribution (QCD)

Taxpayer ≥70.5 may direct up to $108,000 (2025) from a traditional or Roth IRA directly to a qualified charity (trustee-to-trustee). QCD counts toward RMD, is excluded from income, and is NOT also deductible as a charitable contribution. For MFJ, each spouse has their own $108,000 limit (if each has an IRA). IRA trustee must distribute directly to the charity.

Required Minimum Distributions (RMDs)

Must begin by April 1 of the year AFTER reaching:

• Age 73 (born 1951-1959)
• Age 75 (born after 1959, per SECURE 2.0 — applies 2033+)

Applies to: traditional IRA, 401(k), 403(b), 457(b), defined contribution plans. First RMD for someone turning 73 in 2025 is due by April 1, 2026; second by Dec 31, 2026.

Penalty: 25% of amount not distributed (reduced to 10% if corrected within 2 years).

Roth IRA: No RMDs during owner's life. Roth 401(k): RMDs apply (can roll to Roth IRA to avoid).

Rollovers

• 60-day indirect rollover: one per 12-month period (all IRAs aggregated). Must redeposit within 60 days or taxable + 10% penalty if under 59½.
• Direct trustee-to-trustee transfers: unlimited
• QDRO (Qualified Domestic Relations Order): allows division of qualified plans in divorce without penalty
• 529-to-Roth IRA rollover (OBBBA/SECURE 2.0): up to $35,000 lifetime, account must be ≥15 years old, beneficiary's Roth IRA, counts toward annual Roth limit. Contributions (and earnings) made in the prior 5 years are NOT eligible.

Roth Conversion ("Backdoor Roth")

• Convert traditional IRA → Roth IRA. No income limit (high earners can convert). Must pay tax on the pre-tax (deductible) portion + earnings at conversion.
• No 10% early-withdrawal penalty on the conversion itself, BUT if under 59½ and you withdraw the converted amount within 5 tax years of the conversion, a 10% penalty may apply (unless exception).
• Recharacterization is NOT allowed: Conversions made after 2017 cannot be reversed. (Recharacterization of contributions to fix errors/excess still allowed.)
• Inherited traditional IRA: only a spouse beneficiary may convert to Roth; non-spouse beneficiaries cannot convert.
• Form 8606 tracks conversions/basis.

Prohibited Transactions & Prohibited Investments

Prohibited transactions (account ceases to be an IRA — deemed full distribution Jan 1 of year, taxable + possible 10% penalty):

• Using IRA as loan collateral
• Using IRA funds to buy personal-use property (e.g., vacation home for owner)
• Borrowing from the IRA (no IRA loans)
• Selling/leasing/exchanging property to the IRA
• Providing goods/services to the IRA by a disqualified person (family member or controlled business)
• "Family" = spouse, parents, grandparents, children, grandchildren (+ their spouses). NOT in-laws, cousins, aunts/uncles, siblings/step-siblings.

Prohibited investments: collectibles (art, jewelry, antiques, rugs, gems, wine, baseball cards, comic books), most precious metals (narrow exception for certain US-minted gold/silver coins), S corporation stock, life insurance contracts, personal-use real estate. Real estate CAN be held in an IRA if not in taxpayer's name and not used personally.

Inherited IRAs

• Spouse: Can treat as own (roll over) or inherit as beneficiary
• Non-spouse (pre-2020 death): "Stretch" over life expectancy
• Non-spouse (post-2019 death, SECURE Act): 10-year rule (entire balance must be withdrawn by end of 10th year after death). Exceptions for Eligible Designated Beneficiaries (EDB): surviving spouse, minor child (until majority), disabled/chronically ill, beneficiary not >10 years younger than decedent — EDBs may still use life expectancy method.
• Non-spouse cannot convert inherited traditional IRA to Roth (only spouse can).

Trump Accounts (OBBBA — cross-reference)

New tax-advantaged savings account for children. See trump-accounts-529-education-plans.md. Key: $1,000 one-time government contribution for eligible US-citizen children born 2025-2028; $5,000 annual aggregate nongovernmental contribution limit, including up to $2,500 from an employer; withdrawals generally restricted until the year the beneficiary turns 18, after which traditional IRA rules generally apply. Contributions cannot begin before July 4, 2026.

Net Unrealized Appreciation (NUA)

Special tax treatment for employer stock distributed from qualified plan. Ordinary income on cost basis; capital gain on NUA (taxed at sale, not distribution).