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Duration: 10:41

Level: Beginner

The main topics of this lesson are: IRA Contributions – Traditional and Roth IRAs; SEP IRA Contributions; Distributions – Traditional and SEP IRA; and Distributions – Roth IRAs and Roth 401K. For this lesson refer to the Study Notes and watch the video for a synopsis.

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Study Notes:

IRA Contributions – Traditional and Roth IRAs

Traditional and Roth IRAs have annual contribution limits – which are indexed and change periodically.
For owners over 50 an additional contribution (called a catch up) is also allowed. This amount is limited
to $1000. The current (2019) limit for contributions is $6000. If the IRA owner is 50 or over in the year
of contribution an additional $1000 of catch up contribution may be made.

Roth contributions are made from funds after the tax is paid on the amount being contributed.
Traditional IRA contributions are made before tax if you are not employed by an employer offering
another Qualified Plan (401K or Pension) or after tax if you have another plan available to you. If you
make after tax contributions to an IRA, basis is created impacting the taxability of later distributions.
Contributions to both types of IRAs must be done either during the year it applies to or by 4/15 (tax
filing due date) of the following year.

SEP IRA Contributions

Contribution limits to SEP IRAs are also indexed. The limit is composed of 2 factors: 25% of salary or –
for 2019 – $55,000. There is a formula to determine the salary limitation that takes into consideration
FICA and Medicare contributions. Contributions to SEP plans are an adjustment (reduction) to your
taxable income and are pre- tax contributions.

Distributions – Traditional and SEP IRA

Distributions beginning at age 70.5 are required from Traditional IRAs and SEP IRAs. Distributions may
be taken without tax penalty after age 59.5. If a distribution is taken before age 59.5 for reasons other
than the several hardship exceptions, a 10% tax penalty applies. Distributions are subject to both
Federal and State income tax. Tax on distributions will be discussed in a later session. At age 70.5
distributions are required based on an actuarial chart published by the IRS and the fair market value of
the account at the prior year end. This is called the Required Minimum Distribution – RMD. Failure to
take the RMD results in a 50% (1/2 of the amount) tax penalty. Similar requirements apply to 401K and
403B plans.

Distributions – Roth IRAs and Roth 401Ks

There are no required distributions from Roth IRA or Roth 401Ks. There are, however, penalties for
early distributions. A Roth account of either type must be in existence (funded, not just opened) for 5
years before any distributions of earning may be taken without penalty. Contributions may be
withdrawn without penalty. So, if you contribute $6000 to a Roth account and decide 6 months later to
withdraw the amount, you may – but only $6000. If the account is worth $6010 you must leave the $10
earnings for 5 years to withdraw it without penalty. In addition to the 5-year time frame, the same pre
age 59.5 tax penalties for reasons other than the hardship exceptions apply.


A rollover is a transfer from one type of qualified plan, such as a 401K to another type of qualified plan,
such as an IRA. You must transfer a traditional 401K to a traditional IRA or a Roth 401K to a Roth IRA.
This is commonly done when you retire moving funds from your employer’s 401K to your personal IRA.
Only one Rollover is allowed a year and it should be done as a movement between custodians.


This is often referred to as a trustee to trustee transfer. For example: you are not happy with broker X
management of your IRA and choose to move it to broker y. This is a transfer. Ideally this should be
done between the two brokers. You may take the money as a check, but you have 60 days to redeposit
it into another qualified account without taxes being incurred.

Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Supporting documentation for any claims and statistical information will be provided upon request.

Any stock, options or futures symbols displayed are for illustrative purposes only and are not intended to portray recommendations.

Disclosure: Tax-Related Circular 230 Notice

The information in this presentation is provided for informational purposes only, and does not constitute tax advice and cannot be used by the recipient or any other taxpayer to avoid penalties under any federal, state, local or other tax statutes or regulations, or to resolve any tax issue.

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