Retirement and Education Accounts

Traditional and Roth IRAs

An individual retirement account is opened by an individual with earned income. Contributions for 2026 are limited to $7,500, plus a catch-up of $1,100 for those aged 50 and over. The limit is per person across all IRAs combined, and a spousal IRA allows a working spouse to fund an account for a non-working spouse.

A traditional IRA gives a deduction for the contribution — subject to phase-out where the taxpayer or their spouse is covered by an employer plan and income exceeds thresholds — grows tax deferred, and taxes distributions as ordinary income. A non-deductible contribution creates basis, and distributions are then partly a return of that basis.

A Roth IRA gives no deduction. Contributions are made with after-tax money, grow tax free, and qualified distributions are entirely tax free. A distribution is qualified if the account has been open five years and the owner is at least 59½, or is disabled, or is a beneficiary after death, or is taking up to $10,000 for a first home purchase. Contributions — as opposed to earnings — may always be withdrawn tax and penalty free, because they were already taxed. Roth eligibility phases out above income thresholds.

The trade-off is a bet about tax rates: a traditional IRA is better if the rate in retirement will be lower than today's, a Roth if higher. Young earners in low brackets are the standard Roth answer.

Distributions before age 59½ from either type attract a 10 percent penalty on the taxable amount, in addition to ordinary income tax. The exceptions the exam names: death, disability, qualified first-time home purchase up to $10,000, qualified higher education expenses, substantially equal periodic payments, medical expenses above a threshold, health insurance premiums while unemployed, an IRS levy, and qualified birth or adoption expenses.

Prohibited investments inside an IRA include collectibles, artwork, antiques, gems and, with narrow exceptions for certain bullion, precious metals. Life insurance may not be held in an IRA. Margin is generally not permitted, and options strategies are limited to covered positions.

Employer plans and ERISA

A defined benefit plan promises a stated benefit at retirement, usually a formula on salary and years of service. The employer bears the investment risk.

A defined contribution plan promises a contribution, not a benefit. The employee bears the investment risk. The 401(k) is the dominant form: for 2026 the elective deferral limit is $24,500, with a catch-up of $8,000 for those aged 50 and over and a higher catch-up of $11,250 for those aged 60 through 63.

A 403(b), also called a tax-sheltered annuity, serves employees of public schools and certain non-profits. A 457 plan serves state and local government and certain tax-exempt employees. Profit-sharing plans, money purchase plans, SEP IRAs and SIMPLE IRAs cover various small-employer arrangements; the SIMPLE deferral limit for 2026 is $17,000.

The Employee Retirement Income Security Act of 1974 governs private-sector qualified plans. It sets standards for participation, vesting, funding and fiduciary conduct, requires plan fiduciaries to act prudently and solely in the interest of participants and beneficiaries, requires diversification, and creates reporting and disclosure obligations. Public-sector plans and church plans are generally outside ERISA, which is a distinction the exam draws.

A qualified plan's contributions are generally deductible to the employer and not currently taxable to the employee; a non-qualified deferred compensation plan gets neither treatment but is not bound by ERISA's non-discrimination rules, so it can be offered to selected executives only.

Employee stock options and stock purchase plans, and non-qualified deferred compensation, all appear in the outline as things a representative must understand well enough to place in a customer's overall picture.

Rollovers, transfers and distributions

There are two ways to move retirement money, and the difference matters.

A direct transfer, or trustee-to-trustee transfer, moves assets between custodians without the owner taking possession. There is no withholding, no reporting of a distribution, and no limit on frequency.

A rollover distributes the assets to the owner, who must redeposit them into another qualified account within 60 days. Miss the deadline and the whole amount becomes a taxable distribution, plus the 10 percent penalty if the owner is under 59½. An individual may make only one IRA-to-IRA rollover in any twelve-month period, counted across all their IRAs. And a distribution from an employer plan paid to the participant is subject to mandatory 20 percent withholding, which means the participant must make up that 20 percent from other money to roll the full amount.

The practical advice a representative should give is therefore near-automatic: use a direct transfer. The rollover exists, it works, and it has three ways to go wrong that the transfer does not.

Required minimum distributions must begin from traditional IRAs and most employer plans. The required beginning date is April 1 of the year following the year the owner reaches the applicable age — 73 for those reaching 72 after 2022, rising to 75 for later cohorts — and subsequent distributions are due by December 31 each year. Taking the first one in the April grace period means taking two in one calendar year, which is a tax consequence worth flagging. Roth IRAs have no required minimum distributions during the owner's lifetime.

Failure to take a required distribution attracts an excise tax on the amount not taken, reduced where the shortfall is corrected promptly.

Education and disability accounts

A 529 plan is a qualified tuition program under IRC section 529, sponsored by a state. Contributions are made with after-tax dollars, grow tax free, and distributions are tax free when used for qualified education expenses. Contribution limits are set by the plan and are high; contributions are treated as completed gifts for gift tax purposes, and a special election permits five years of annual exclusion gifts in one year. The account owner — usually the parent — retains control, the beneficiary may be changed to another family member, and non-qualified withdrawals are taxable on the earnings plus a 10 percent penalty.

A 529 plan is a municipal fund security, defined as such by MSRB Rule D-12, and is therefore sold under MSRB rules rather than under the Investment Company Act. That has practical consequences: the disclosure document is a program disclosure document rather than a prospectus, MSRB Rule G-45 requires reporting of information on municipal fund securities, and a representative must disclose that a customer buying an out-of-state plan may forfeit state tax benefits their own state offers. That disclosure is a standing exam answer.

A Coverdell Education Savings Account under IRC section 530 permits a smaller annual contribution, phased out at higher incomes, with tax-free growth and distributions for qualified education expenses including at elementary and secondary level. Contributions must stop at the beneficiary's age 18 and the account must generally be used by age 30.

An ABLE account, also a municipal fund security, allows a person who became disabled before a specified age to save without losing means-tested benefits, with tax-free growth and distributions for qualified disability expenses.

Local government investment pools — LGIPs — are the third category of municipal fund security, used by municipalities themselves rather than by retail customers.

Suitability inside a tax-advantaged account

Three rules follow from the wrapper, and each of them is a reliable exam question.

Do not put a tax-exempt security in a tax-deferred account. A municipal bond inside an IRA gives up yield to buy an exemption the account already provides — and worse, the eventual distribution is taxed as ordinary income, so the exemption is not merely wasted but reversed.

Be sceptical about annuities inside qualified accounts. A variable annuity's core benefit is tax deferral, which the IRA already has. The recommendation needs a reason beyond deferral — a guaranteed living benefit the customer actually wants — and the additional cost has to be justified against that reason.

Watch the liquidity mismatch. Illiquid products — non-traded REITs, DPPs, long-surrender-charge annuities — sit badly against a required minimum distribution schedule that forces sales on a timetable.

And one that runs the other way: tax-inefficient assets belong inside the wrapper. Corporate bonds, high-turnover funds and REITs generate ordinary income, and sheltering them is worth more than sheltering assets that already receive favourable rates.