Your client is 74, took a partial 401(k) distribution, rolled some to an IRA, did a Roth conversion in October, and started Social Security. Five forms, four tax treatments, one return. This lesson maps it.
A traditional IRA defers tax: contributions may be deductible, growth is tax-free until distribution, then ordinary rates apply on the taxable portion. A Roth IRA accepts after-tax contributions; qualified distributions are entirely tax-free.
2025 limits: $7,000 combined across all IRAs, $8,000 if age 50 by year-end. You need earned income (wages or net SE earnings) to contribute. A non-working spouse can use the working spouse's earned income on a joint return (spousal IRA).
Traditional deduction phaseout (active participant in an employer plan): Single/HoH $79,000 to $89,000; MFJ both active $126,000 to $146,000; MFJ non-active spouse where the other is active $236,000 to $246,000; MFS active $0 to $10,000. Neither spouse active: deduction unlimited regardless of AGI.
Roth contribution phaseout: Single/HoH $150,000 to $165,000; MFJ $236,000 to $246,000; MFS $0 to $10,000.
Common mistakes
- Treating each traditional IRA separately for the pro-rata rule. All traditional, SEP, and SIMPLE IRAs aggregate on Form 8606; only Roth IRAs stand apart.
- Applying the age-55 separation-from-service exception to IRA distributions. The exception is plan-only; once you roll to an IRA the 59½ rule controls every dollar.
- Calling the missed-RMD excise 50%. The 2025 rate is 25%, dropping to 10% if corrected within 2 years with Form 5329 explanation attached.
Bottom line
- 2025 IRA limit $7,000 ($8,000 if 50+); Roth phaseout $150k to $165k single, $236k to $246k MFJ; traditional deduction phaseout (active participant) $79k to $89k single, $126k to $146k MFJ
- RMDs at age 73 (SECURE 2.0); first RMD can defer to April 1 of the next year; missed-RMD excise 25% (10% if corrected within 2 years); Roth IRAs have no lifetime RMD
- 10% early-distribution penalty before 59½; exceptions for both include SOSEPP, disability, death, $5,000 birth or adoption, $1,000 emergency, medical above 7.5% AGI; first home ($10,000) and higher education are IRA-only
- Social Security taxability 0/50/85% on provisional income (AGI + tax-exempt interest + ½ SS); thresholds $25k/$34k single, $32k/$44k MFJ; MFS living together starts at $0
Exam shortcut
"What form tracks IRA basis?" Always Form 8606. Basis recovers pro-rata; remaining basis lives on line 14 to carry forward. "Distribution before 59½ with no listed exception?" Add 10% on Form 5329. Conversions are immune to the 10% on the conversion itself but each conversion starts its own 5-year clock for principal pulled out early. "How much SS is taxable?" Below the lower threshold: 0%.
The full lesson (about 2,941 words, 20 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
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