Introduction
Understanding retirement accounts is crucial for success on the FINRA Series 7 exam. This section covers the key aspects of Traditional and Roth IRAs and Employer-Sponsored Plans such as SEP IRAs, SIMPLE IRAs, and individual 401(k)s, providing essential knowledge for future securities representatives.
Traditional and Roth IRAs
Individual Retirement Accounts (IRAs) are vital components of personal retirement planning, offering tax advantages to encourage saving.
Traditional IRAs
- Eligibility: Individuals under 70½ with earned income.
- Contribution Limits: For 2024, up to $6,500 annually, with a $1,000 catch-up for those 50 and older.
- Tax Treatment: Contributions may be tax-deductible, with taxes deferred until withdrawal, which must begin by age 72.
Roth IRAs
- Eligibility: Income limits apply; check the IRS guidelines for specifics.
- Contribution Limits: Same as Traditional IRAs, but income levels may reduce the maximum allowable contribution.
- Tax Treatment: Contributions are not tax-deductible; however, qualified withdrawals are tax-free.
These plans are designed to help small business owners and self-employed individuals save for retirement.
SEP IRAs
- Designed for: Small businesses and self-employed individuals.
- Contribution Limits: The lesser of 25% of an employee’s compensation or $61,000 for 2024.
- Tax Treatment: Contributions are tax-deductible for employers; taxed upon withdrawal.
SIMPLE IRAs
- Designed for: Small employers with 100 or fewer employees.
- Contribution Limits: Up to $15,500 annually, with a $3,000 catch-up for those over 50.
- Tax Treatment: Contributions are tax-deductible; withdrawals taxed at the standard rate.
Individual 401(k)s
- Designed for: Sole proprietors and small business owners with no employees other than a spouse.
- Contribution Limits: Combines employee contributions (up to $22,500) and employer contributions, with a total maximum of $66,000.
- Tax Treatment: Tax-deferred contributions; taxed upon distribution.
Conclusion
Retirement accounts such as Traditional and Roth IRAs, along with Employer-Sponsored Plans, offer diverse options to save for retirement while enjoying tax benefits. A strong grasp of these accounts can not only aid in passing the FINRA Series 7 exam but also prove invaluable in advising future clients.
Glossary
- IRA (Individual Retirement Account): A savings account with tax advantages that individuals can use to save and invest long-term.
- SEP IRA (Simplified Employee Pension Individual Retirement Arrangement): An employer-sponsored retirement plan for self-employed individuals and small business owners.
- SIMPLE IRA (Savings Incentive Match Plan for Employees): A retirement plan that allows employees and employers to contribute.
- Catch-Up Contribution: Additional contribution amount that individuals age 50 or older can add to their retirement accounts.
Additional Resources
### Which of the following statements is true regarding Traditional IRAs?
- [x] Contributions may be tax-deductible.
- [ ] Contributions are always tax-free.
- [ ] Withdrawals are never taxed.
- [ ] There are no age limits for contributions.
> **Explanation:** Contributions to Traditional IRAs may be tax-deductible, providing immediate tax benefits, while withdrawals are taxed as income.
### What is the maximum catch-up contribution for a Roth IRA?
- [x] $1,000
- [ ] $2,000
- [ ] $5,000
- [ ] $6,500
> **Explanation:** For individuals aged 50 or older, the catch-up contribution limit for IRAs, including Roth IRAs, is $1,000.
### Who is eligible to contribute to a Roth IRA?
- [x] Individuals within IRS income limits.
- [ ] Only individuals with no taxable income.
- [ ] Anyone under age 70½ with earned income.
- [ ] All self-employed individuals without income restrictions.
> **Explanation:** Eligibility to contribute to a Roth IRA is based on specific income limits set by the IRS, differing from Traditional IRAs.
### How is the SIMPLE IRA beneficial for small employers?
- [x] Provides a simple way to offer a retirement plan with employer matching.
- [ ] Requires no minimum contributions from employees.
- [ ] Has higher contribution limits than all other plans.
- [ ] Offers tax-free contributions to employees.
> **Explanation:** SIMPLE IRAs allow employers to match employee contributions, offering tax benefits while being easier to manage than more complex plans.
### What are the contribution limits for a SEP IRA in 2024?
- [x] Lesser of 25% of compensation or $61,000.
- [ ] Fixed at $50,000 per year.
- [x] Up to the total annual income of the business.
- [ ] No set limit; depends on company earnings.
> **Explanation:** Contributions to SEP IRAs are limited to the lesser of 25% of the employee's compensation or $61,000 in 2024.
### What distinguishes an Individual 401(k) from other retirement plans?
- [x] Suitable for sole proprietors with no employees.
- [ ] Available only to corporations with numerous employees.
- [ ] No contribution limits apply.
- [ ] Exclusively funded by employer contributions.
> **Explanation:** Individual 401(k)s are particularly suitable for self-employed individuals or business owners with no other employees, allowing significant tax-deferred savings.
### Which account type allows for tax-free qualified withdrawals?
- [x] Roth IRA
- [ ] Traditional IRA
- [x] SEP IRA
- [ ] SIMPLE IRA
> **Explanation:** Roth IRA contributions are taxed upfront, allowing qualified distributions, including earnings, to be tax-free.
### At what age must withdrawals begin from a Traditional IRA?
- [x] 72
- [ ] 59½
- [ ] 62
- [ ] 70½
> **Explanation:** Required Minimum Distributions (RMDs) must begin from a Traditional IRA by April 1st of the year following the account holder reaching age 72.
### What is a major benefit of tax-deferred accounts like a Traditional IRA?
- [x] Earnings grow tax-free until withdrawn.
- [ ] Contributions and earnings are never taxed.
- [ ] Withdrawals can be made at any age without penalties.
- [ ] They are exclusively available to high-income earners.
> **Explanation:** Tax-deferred accounts like Traditional IRAs allow earnings to grow without being taxed until they are withdrawn.
### True or False: A SIMPLE IRA can only be established by an employer with fewer than 100 employees.
- [x] True
- [ ] False
> **Explanation:** A SIMPLE IRA is specifically designed for small businesses with 100 or fewer employees.