EA Part 1 Retirement Accounts: IRA Rules, Contribution Limits, and RMDs

Retirement account rules are heavily tested on EA Part 1 because they involve multiple interacting thresholds: who can contribute, how much, whether the contribution is deductible, and what happens when money comes out. Errors in this area typically stem from confusing Traditional IRA deductibility rules with Roth IRA contribution eligibility rules — they are different phase-out ranges applied to different concepts.

Traditional IRA: Contributions and Deductibility

Contribution limit (2024): $7,000 per year ($8,000 if age 50 or older by year-end). The contribution cannot exceed the taxpayer's taxable compensation for the year.

Anyone with earned income can contribute to a Traditional IRA, but the deductibility of contributions depends on whether the taxpayer (or their spouse, on a joint return) is covered by an employer retirement plan at work.

Not Covered by an Employer Plan

If neither the taxpayer nor their spouse is covered by a workplace plan, Traditional IRA contributions are fully deductible at any income level.

Covered by an Employer Plan: Deductibility Phase-Out

If the taxpayer is covered by a workplace plan, the deduction phases out based on MAGI:

Filing Status	Phase-Out Begins	Phase-Out Ends
Single / HOH	$77,000	$87,000
MFJ (covered spouse)	$123,000	$143,000
MFS (covered spouse)	$0	$10,000

Spouse Not Covered by Plan, But Other Spouse Is

If only one spouse is covered by a workplace plan, the non-covered spouse can still deduct IRA contributions up to a separate phase-out range: $230,000–$240,000 (MFJ, 2024). This is a higher threshold designed to allow spousal IRA contributions for non-working or lower-earning spouses.

Non-deductible contributions are still allowed at any income level. The taxpayer tracks the basis using Form 8606.

Roth IRA: Contributions and Phase-Outs

Roth IRA contributions are never deductible. The benefit is tax-free growth and tax-free qualified distributions.

Contribution limit (2024): Same as Traditional IRA — $7,000 ($8,000 if 50+), reduced dollar-for-dollar by Traditional IRA contributions made for the same year.

Eligibility phase-out based on MAGI:

Filing Status	Phase-Out Begins	Phase-Out Ends
Single / HOH	$146,000	$161,000
MFJ	$230,000	$240,000
MFS	$0	$10,000

Above the upper limit, no Roth IRA contribution is permitted. There is no age limit for Roth contributions as long as there is earned income.

Roth Conversions

Any taxpayer can convert a Traditional IRA (or other pre-tax retirement account) to a Roth IRA regardless of income. The converted amount is includable in gross income in the year of conversion. There is no 10% early distribution penalty on conversions, but the 5-year holding period for qualified distributions restarts for each conversion.

Qualified Distributions from Roth IRAs

A Roth IRA distribution is qualified (and therefore tax-free) if:

1. The 5-year holding period has been satisfied (measured from the first year a Roth IRA was established), AND
2. The distribution is made after the owner reaches age 59½, becomes disabled, dies, or uses up to $10,000 for a first-time home purchase

Contributions (not earnings) can always be withdrawn tax-free and penalty-free at any time.

Early Distributions: The 10% Penalty

Distributions from Traditional IRAs, 401(k)s, and similar plans before age 59½ are subject to regular income tax plus a 10% early distribution penalty.

Exceptions to the 10% penalty:

• Death or disability of the account owner
• Substantially equal periodic payments (72(t) distributions — see below)
• Unreimbursed medical expenses exceeding 7.5% of AGI
• Health insurance premiums while unemployed (IRA only)
• First-time home purchase — up to $10,000 lifetime limit (IRA only)
• Higher education expenses (IRA only)
• IRS levy
• Qualified reservist distributions
• Birth or adoption — up to $5,000 per event (after 2019)
• SEPP (see 72(t))

Note: Financial hardship is not a penalty exception for IRAs.

72(t) Substantially Equal Periodic Payments

A taxpayer who needs to access retirement funds before age 59½ without penalty can set up a series of substantially equal periodic payments (SEPPs) calculated under one of three IRS-approved methods. Once started, the SEPP must continue without modification for the later of five years or until the taxpayer reaches age 59½. Any modification before that point retroactively triggers the 10% penalty on all prior distributions.

Required Minimum Distributions (RMDs)

Under the SECURE 2.0 Act, the RMD starting age is 73 for taxpayers who reached age 72 after December 31, 2022. (It increases to age 75 for taxpayers born in 1960 or later.)

RMD basics:

• Applies to Traditional IRAs, SEP-IRAs, SIMPLE IRAs, and most employer plans (401(k), 403(b), 457(b))
• Roth IRAs are exempt from RMDs during the owner's lifetime — a key distinction
• The first RMD can be delayed until April 1 of the year after the taxpayer reaches RMD age, but this causes two RMDs in that second year
• RMDs from multiple Traditional IRAs can be aggregated — the total can be taken from any one or combination of IRAs

Penalty for missing RMDs: Before 2023, the penalty was 50% of the shortfall. SECURE 2.0 reduced it to 25% (or 10% if corrected in a timely manner).

Common Exam Traps

Trap 1: The Traditional IRA phase-out tests whether the taxpayer is covered by a plan at work — not whether they actually contributed to it or vested. Even nominal participation in a 401(k) with no employer match triggers the phase-out.

Trap 2: A non-deductible Traditional IRA contribution still requires the taxpayer to file Form 8606 to establish basis. Without this, all future distributions will be taxed in full.

Trap 3: Inherited Roth IRAs (other than from a spouse) are subject to RMDs. The exception from RMDs only applies to the original Roth IRA owner during their lifetime.

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