Retirement accounts occupy a unique position in the US tax system. They are one of the few places where Congress has deliberately deferred or permanently eliminated tax on investment returns, and the rules governing them have been revised repeatedly, most recently by the SECURE Act 2.0 in late 2022, which moved the required minimum distribution age, expanded catch-up contributions, and introduced several new provisions that remain poorly understood even among regular filers.

This article covers the structure of the main individual retirement account types, the deduction and contribution rules that determine how much can be sheltered, the distribution rules that govern when and how money can come out, and the specific provisions that affect expats, non-US persons, and people inheriting retirement accounts. For founders who split their careers between employment and self-employment, and for internationally mobile taxpayers whose retirement savings span multiple countries, the rules here interact with much of the rest of the return.

The two fundamental approaches to retirement account taxation

Every US retirement account operates on one of two tax models. The traditional model gives a deduction now and taxes distributions later. The Roth model gives no deduction now but allows tax-free distributions later. The choice between the two is a bet on whether your tax rate today is higher or lower than your tax rate in retirement.

This framing is useful but incomplete, because the comparison is not just about marginal rates. Roth accounts have no required minimum distributions during the account holder's lifetime, which makes them a more flexible estate planning tool. Traditional accounts force distributions starting at age 73, generating taxable income regardless of whether the account holder needs the money. Roth conversions allow a strategic shift from one model to the other at times when the tax cost of converting is relatively low. And for expats, the treatment of Roth accounts under foreign tax treaty provisions is often unfavorable in ways that complicate the picture significantly.

Traditional IRA: contributions and deductibility

A traditional individual retirement account allows contributions of up to $7,000 per year for 2025 and 2026, plus an additional $1,000 catch-up contribution for taxpayers aged 50 and over. The contribution limit applies across all IRA accounts combined, not per account. A taxpayer with three traditional IRAs can still only contribute $7,000 in total.

Contributions must be made from earned income, which includes wages, salaries, self-employment income, and alimony received under pre-2019 agreements. Investment income does not count as earned income for IRA contribution purposes. A taxpayer with $200,000 in dividend income and no other income cannot contribute to an IRA.

Whether a traditional IRA contribution is deductible depends on two factors: whether the taxpayer or their spouse is covered by a workplace retirement plan, and if so, what their modified adjusted gross income is.

Deductibility when covered by a workplace plan

If the taxpayer is covered by a 401(k), 403(b), or similar employer plan during the year, the deduction phases out at certain income levels. For 2025, the phaseout range is $79,000 to $89,000 for single filers and $126,000 to $146,000 for married filing jointly. Within the phaseout range, the deductible amount is reduced proportionally. Above the top of the range, no deduction is available.

If the taxpayer is not covered by a workplace plan but their spouse is, the phaseout range is wider: $236,000 to $246,000 for 2025. A high-earning spouse covered by a 401(k) does not therefore automatically eliminate the other spouse's IRA deduction unless their joint income is very high.

A contribution to a traditional IRA that is not deductible can still be made. The non-deductible contribution is tracked on Form 8606 and creates after-tax basis in the IRA. When distributions are taken later, the after-tax basis is recovered tax-free on a pro-rata basis across all traditional IRA balances, which is a point that catches many taxpayers off guard.

The pro-rata rule

The pro-rata rule governs the taxation of distributions from traditional IRAs when the account holder has a mixture of pre-tax and after-tax (non-deductible) contributions. You cannot simply designate which dollars are coming out. Each distribution is treated as consisting of a proportionate share of after-tax basis and pre-tax amounts based on the ratio of total after-tax basis to total traditional IRA value across all accounts.

Example

Helen has made $20,000 of non-deductible IRA contributions over the years, tracked on Form 8606. Her total traditional IRA balance across all accounts is $200,000. Her after-tax basis is therefore 10% of the total.

She takes a $30,000 distribution. Under the pro-rata rule, 10% ($3,000) is a tax-free return of basis and 90% ($27,000) is taxable as ordinary income.

She cannot choose to withdraw only the after-tax contributions first, regardless of how the accounts are structured.

This pro-rata rule is what makes the backdoor Roth IRA strategy complex for people who already hold significant pre-tax IRA balances. The strategy involves making a non-deductible traditional IRA contribution and then converting it to a Roth, but the conversion triggers the pro-rata calculation across all traditional IRA balances, not just the newly contributed amount.

Roth IRA: contributions and income limits

A Roth IRA allows the same annual contribution limits as a traditional IRA: $7,000 for 2025 and 2026, plus the $1,000 catch-up for those aged 50 and over. The key difference is that contributions are made with after-tax dollars and qualified distributions are entirely tax-free, including all the earnings accumulated over the account's life.

Roth IRA contributions are subject to income limits regardless of workplace plan coverage. For 2025, the ability to contribute phases out between $150,000 and $165,000 of modified AGI for single filers and between $236,000 and $246,000 for married filing jointly. Above the top of the phaseout range, direct Roth contributions are not permitted.

The limits apply to direct contributions. Conversions from traditional IRAs to Roth IRAs have no income limit, which is the basis for the backdoor Roth strategy used by high earners who exceed the direct contribution threshold.

Qualified distributions from a Roth IRA

A distribution from a Roth IRA is qualified, and therefore tax-free, if two conditions are met. First, the account must have been open for at least five years, measured from January 1 of the first tax year for which a Roth contribution was made. Second, the distribution must occur after the account holder turns 59 and a half, or due to death, disability, or a first-time home purchase up to a lifetime limit of $10,000.

Contributions to a Roth IRA, as distinct from earnings, can always be withdrawn tax-free and penalty-free at any time because they were made with after-tax dollars. The five-year rule and the age requirement apply only to the earnings portion of a distribution. This flexibility makes the Roth IRA useful as a secondary emergency reserve for some taxpayers.

There are no required minimum distributions from a Roth IRA during the account holder's lifetime. This is one of the most significant planning advantages of Roth accounts: the money can remain invested and compounding indefinitely, and the full balance passes to heirs without triggering immediate income tax.

Roth conversions

A Roth conversion moves money from a traditional IRA or employer plan to a Roth IRA. The converted amount is included in gross income in the year of conversion and taxed at ordinary income rates. There is no 10% early withdrawal penalty on a conversion, though the penalty applies to subsequent distributions of converted amounts within five years if the account holder is under 59 and a half.

The decision to convert involves weighing the current tax cost against the long-term benefit of tax-free growth and the elimination of required minimum distributions. Conversions are most attractive in years when taxable income is unusually low, such as the year a business is sold at a loss, a gap year between jobs, or early retirement before Social Security and RMDs begin generating income. Partial conversions allow the taxpayer to control how much is converted each year and to target specific bracket thresholds.

Example

Robert retires at 62 with a traditional IRA of $800,000. His only income for the next several years will be from part-time work: approximately $30,000 per year. Social Security begins at 67 and RMDs begin at 73.

He has a window of roughly five years where his taxable income is low. Converting $50,000 per year from his traditional IRA to a Roth keeps him in the 22% bracket and gradually reduces the balance subject to future RMDs.

By 73, his traditional IRA balance is lower, his RMDs are smaller, and a larger portion of his retirement assets generates no future required distributions.

Employer retirement plans: 401(k), 403(b), and similar

Employer-sponsored retirement plans follow a similar tax structure to IRAs but with significantly higher contribution limits and additional complexity around employer matching and vesting.

For 2025, the employee elective deferral limit for 401(k) and 403(b) plans is $23,500, with a catch-up contribution of $7,500 for those aged 50 and over, bringing the total to $31,000. A further enhanced catch-up applies specifically to employees aged 60 to 63: for 2025, this group can contribute an additional $11,250 rather than the standard $7,500, for a total of $34,750. This enhanced catch-up was introduced by SECURE Act 2.0 and represents a meaningful planning opportunity for people in their early sixties who are in peak earning years.

The overall annual additions limit, which includes both employee contributions and employer contributions, is $70,000 for 2025. For business owners running their own 401(k), as discussed in Part 3, this is the ceiling on the combined employee and employer contribution.

Traditional versus Roth 401(k)

Most employer plans now offer both a traditional pre-tax option and a Roth option within the 401(k). The same annual contribution limits apply regardless of which option is used or how contributions are split between the two. Unlike Roth IRAs, there are no income limits on Roth 401(k) contributions, which makes them accessible to high earners who cannot contribute directly to a Roth IRA.

Beginning in 2024 under SECURE Act 2.0, employer matching contributions can be made to the Roth side of a 401(k) if the plan permits. Previously, employer matches always went to the pre-tax side regardless of the employee's own contribution election. This change allows for a fully Roth employer plan structure, though not all plans have adopted it.

Vesting

Employee contributions to a 401(k) are always 100% vested immediately. Employer matching contributions are subject to vesting schedules, which determine how long an employee must work before the employer's contributions are fully theirs to keep. Cliff vesting makes the full match available after a specified period, typically two to three years. Graded vesting phases in the match over a period of up to six years. An employee who leaves before full vesting forfeits the unvested portion of employer contributions.

Pension and annuity income

Pension income from a defined benefit plan and annuity payments from an insurance contract are ordinary income when received, subject to a calculation that determines how much of each payment is a taxable recovery of employer contributions and how much is a non-taxable recovery of the employee's own after-tax cost in the contract.

If the employee made no after-tax contributions to the plan, the full amount of each payment is taxable. This is the case for most traditional employer pensions where the employer funded the plan entirely.

Where the employee did contribute after-tax amounts, two methods exist to calculate the taxable portion: the general rule and the simplified method. The IRS requires use of the simplified method for most pensions and annuities from qualified plans that began after November 18, 1996.

Under the simplified method, the non-taxable portion of each payment is calculated by dividing the employee's total cost in the contract (their after-tax contributions) by the total number of anticipated payments, taken from an IRS table based on the annuitant's age at the annuity start date. For a single life annuity starting at age 65, the table factor is 260 monthly payments. If the employee's cost in the contract is $52,000, the non-taxable portion of each monthly payment is $52,000 divided by 260, which is $200. The remainder of each payment is taxable ordinary income. Once the full after-tax cost has been recovered, every subsequent payment is fully taxable.

If the annuitant dies before recovering the full after-tax cost, the unrecovered amount is deductible as a miscellaneous itemized deduction on the final return.

Required minimum distributions

Traditional IRAs and most employer plan accounts are subject to required minimum distributions, known as RMDs. Starting at age 73 for anyone who turns 73 after December 31, 2022, account holders must withdraw a minimum amount each year or face a significant penalty on the shortfall.

The RMD for a given year is calculated by dividing the account balance as of December 31 of the prior year by a life expectancy factor from the IRS Uniform Lifetime Table. The factor decreases each year as the account holder ages, which means the percentage required to be distributed increases over time. A 73-year-old with a $1,000,000 traditional IRA using the 2025 tables would divide by a factor of approximately 26.5, producing an RMD of around $37,736.

RMDs are ordinary income in the year received. For retirees who do not need the income, RMDs can push them into higher brackets, increase the taxable portion of Social Security benefits, trigger higher Medicare premiums, and even generate NIIT exposure on other investment income. The interaction between RMDs and these other thresholds is one of the most important planning considerations in retirement.

First-year RMD election

In the first year an RMD is required, the account holder has the option to delay the distribution until April 1 of the following year rather than taking it by December 31. This is the only year where this delay is permitted. The practical consequence is that if the first RMD is delayed to April 1, two RMDs must be taken in that second year: the delayed first-year RMD and the second-year RMD. Depending on income in both years, it may or may not make sense to take the first distribution on time rather than bunching two into one year.

Qualified charitable distributions

Account holders aged 70 and a half or older can make a qualified charitable distribution, or QCD, directly from a traditional IRA to an eligible charity. For 2025, the annual limit is $108,000. A QCD satisfies all or part of the RMD for the year but is excluded from gross income entirely, unlike a regular distribution which would be taxable.

This is one of the most tax-efficient ways to give to charity for retirees with traditional IRAs. A taxpayer who takes a $20,000 RMD and then donates $20,000 to charity gets a charitable deduction only if they itemize, and only to the extent itemized deductions exceed the standard deduction. A $20,000 QCD instead produces zero taxable income from the IRA distribution, with no need to itemize. For most retirees taking the standard deduction, the QCD is significantly more valuable than a deduction would be.

Example

Margaret is 75, takes the standard deduction, and has a traditional IRA RMD of $45,000. She plans to donate $20,000 to her university this year.

Option A: Take the full $45,000 RMD as income, then write a $20,000 check to the university. She pays income tax on $45,000 and receives no additional deduction because she takes the standard deduction.

Option B: Direct $20,000 of the RMD as a QCD to the university. She pays income tax on only $25,000 and satisfies her full $45,000 RMD obligation.

The QCD saves her the income tax on $20,000 of income, approximately $4,400 in the 22% bracket, with no change in her actual charitable giving.

Early withdrawals and the 10% penalty

Distributions from a traditional IRA or 401(k) before age 59 and a half are subject to a 10% additional tax on top of ordinary income tax, unless an exception applies. This penalty is designed to discourage using retirement accounts as general-purpose savings vehicles.

The exceptions to the 10% penalty are numerous and worth knowing in detail, both because they represent legitimate planning options and because they are tested extensively on the EA exam. The following exceptions apply to both IRAs and employer plans unless noted otherwise.

Death and disability are universal exceptions. Distributions made after the death of the account holder or because the account holder is permanently and totally disabled are not subject to the penalty.

Substantially equal periodic payments, known as SEPP or the 72(t) election, allow an account holder to take a series of payments calculated under one of three IRS-approved methods without penalty. Once begun, the payments must continue for at least five years or until age 59 and a half, whichever is later. Modifying or stopping the payments before the end of the required period triggers the penalty retroactively on all prior distributions plus interest. This is a serious commitment and should not be entered into without careful planning.

Medical expenses exceeding 7.5% of adjusted gross income can be withdrawn from an IRA without penalty. The medical expense must be deductible under the normal rules, though the taxpayer does not actually need to itemize to use this exception.

Health insurance premiums paid while unemployed are exempt from the penalty for IRA distributions, provided the account holder received unemployment compensation for at least 12 consecutive weeks and the distribution is taken in the year of unemployment or the following year.

First-time home purchase distributions of up to $10,000 lifetime from an IRA are penalty-free. First-time buyer is defined broadly as someone who has not owned a principal residence in the two years before the purchase. The $10,000 is a lifetime limit, not an annual one, and applies per person, so a married couple can each access $10,000 from their respective IRAs.

Higher education expenses for the taxpayer, spouse, children, or grandchildren qualify for a penalty-free IRA withdrawal. The expenses must be for tuition, fees, books, supplies, and room and board at an eligible institution.

The additional exception that applies to employer plans but not IRAs is the age 55 rule: an employee who separates from service in or after the year they turn 55 can take distributions from that employer's plan without the 10% penalty. This does not apply to IRA rollovers of the same money, which is one reason it can be worth leaving money in a former employer's plan rather than rolling it to an IRA if early access may be needed.

EA exam note

The distinction between exceptions that apply to both IRAs and employer plans and those that apply only to one is a frequent source of exam questions. The age 55 separation-from-service exception applies to employer plans only. The health insurance premium exception applies to IRAs only. Knowing which exception applies to which account type is more testable than knowing all the exceptions in the abstract.

Rollovers and transfers

Moving money between retirement accounts can be done in two ways: a direct rollover (also called a trustee-to-trustee transfer) or an indirect rollover. The distinction matters because only one method creates withholding and timing risk.

A direct rollover moves funds directly from one plan or account to another without the account holder ever receiving the money. There is no withholding and no deadline risk. This is the recommended method for any account-to-account movement.

An indirect rollover pays the funds to the account holder, who then has 60 days to redeposit the money into a qualifying retirement account. For distributions from employer plans, the plan is required to withhold 20% of the distribution for federal taxes, even if the taxpayer intends to roll the money over. To complete the rollover in full, the taxpayer must deposit 100% of the distributed amount into the new account within 60 days, making up the 20% withholding from other funds. If only the net 80% is deposited, the withheld 20% is treated as a taxable distribution and potentially subject to the 10% penalty.

Only one indirect IRA-to-IRA rollover is permitted per 12-month period, regardless of how many IRAs the taxpayer holds. This one-rollover-per-year rule does not apply to direct transfers or to rollovers from employer plans to IRAs.

Example

David leaves his employer and receives a check for his 401(k) balance of $150,000. The plan withholds 20%, so he receives $120,000.

He has 60 days to roll over the full $150,000 to avoid tax and penalties. He deposits $120,000 from the check plus $30,000 from his savings account into a new IRA within 60 days.

He receives a $30,000 tax refund (or credit against tax owed) from the withheld amount when he files his return.

If he deposits only the $120,000 he received, the $30,000 withheld is treated as a taxable distribution, subject to income tax and the 10% penalty if he is under 59 and a half.

Inherited retirement accounts

The rules for inherited retirement accounts changed significantly with the SECURE Act in 2019 and were further clarified in IRS regulations in 2024. The treatment depends on the relationship between the beneficiary and the deceased account holder.

Eligible designated beneficiaries

A surviving spouse, a minor child of the account holder, a disabled or chronically ill individual, and beneficiaries who are not more than ten years younger than the deceased are classified as eligible designated beneficiaries. These beneficiaries have the most flexibility. A surviving spouse can roll the inherited account into their own IRA and treat it as their own, effectively resetting all the RMD rules as if they were the original owner. This is the most favorable treatment available.

Other eligible designated beneficiaries can stretch distributions over their own life expectancy, which preserves the tax-deferred growth for a longer period. A minor child of the account holder must switch to the ten-year rule once they reach the age of majority.

The ten-year rule for most non-spouse beneficiaries

Most non-spouse beneficiaries, such as adult children, siblings, or friends, must empty the inherited account within ten years of the original account holder's death. The money does not need to come out in equal annual installments, but the entire balance must be distributed by December 31 of the tenth year.

Whether annual RMDs are required during the ten-year period depends on whether the original account holder had already reached their required beginning date for RMDs before dying. If the account holder died after their required beginning date, the beneficiary must take annual distributions based on the beneficiary's life expectancy during the ten-year period, with the full remaining balance out by year ten. If the account holder died before their required beginning date, no annual RMDs are required during the ten years, but everything must still be distributed by the end of year ten.

This rule has significant planning implications. A beneficiary who inherits a large traditional IRA and must empty it within ten years may face a decade of elevated taxable income. Timing distributions to coincide with lower-income years, or spreading distributions evenly to avoid bracket creep, can make a meaningful difference to the total tax paid.

Cross-border note for expats and non-US persons

US retirement accounts present particular complexity for non-US persons and US expats. Most US tax treaties do not recognize Roth IRAs as pension funds, which means the tax-free treatment available in the US is often not respected by the foreign country of residence. Distributions from a traditional IRA may be taxed in both countries, with the foreign tax credit providing only partial relief depending on the treaty and the applicable baskets.

Non-resident aliens who inherit US retirement accounts are generally subject to 30% withholding on distributions, reduced by treaty where applicable. The ten-year rule applies regardless of the beneficiary's residency status.

These interactions are addressed more fully in Part 10, which covers cross-border taxation.

Social Security and retirement income interaction

Social Security benefits are not fully taxable. Whether they are taxed at all, and by how much, depends on a calculation that combines the Social Security benefit with other income. Up to 85% of Social Security benefits may be included in gross income for higher-income retirees.

The calculation uses a figure called provisional income, which is adjusted gross income plus tax-exempt interest plus 50% of Social Security benefits. If provisional income is below $25,000 for a single filer or $32,000 for a married couple, no Social Security is taxable. If provisional income is between $25,000 and $34,000 for single filers, up to 50% of benefits are taxable. Above $34,000 for single filers (and $44,000 for married couples), up to 85% of benefits are included in income.

The inclusion of tax-exempt municipal bond interest in the provisional income calculation is one of the more counterintuitive features of this rule. A retiree who holds municipal bonds specifically to reduce taxable income finds that the interest nevertheless counts toward the threshold for Social Security taxation. This is why investment allocation decisions in retirement are often driven as much by their interaction with Social Security taxation as by their direct income tax treatment.

Example

Sandra is single, retired, and receives $24,000 in Social Security. Her other income is $28,000 from IRA distributions and $5,000 in municipal bond interest.

Provisional income: $28,000 + $5,000 + ($24,000 x 50%) = $45,000.

This exceeds $34,000, so up to 85% of her Social Security is taxable. The taxable portion is the lesser of 85% of $24,000 ($20,400) or a formula-based calculation. In this case, $20,400 of her Social Security is included in gross income.

The municipal bond interest, while not directly taxable, contributed to pushing her provisional income above the 85% threshold, effectively causing part of her Social Security to be taxed.

Key figures for 2025 and 2026

Key figures for 2025 and 2026

IRA contribution limit: $7,000 (both years); $8,000 for age 50 and over

Traditional IRA deduction phaseout (single, covered by plan): $79,000 to $89,000 (2025); $81,000 to $91,000 (2026)

Traditional IRA deduction phaseout (MFJ, covered by plan): $126,000 to $146,000 (2025); $129,000 to $149,000 (2026)

Traditional IRA phaseout (not covered, spouse is): $236,000 to $246,000 (2025); $242,000 to $252,000 (2026)

Roth IRA contribution phaseout (single): $150,000 to $165,000 (2025); $153,000 to $168,000 (2026)

Roth IRA contribution phaseout (MFJ): $236,000 to $246,000 (2025); $242,000 to $252,000 (2026)

401(k) / 403(b) elective deferral limit: $23,500 (2025); $24,500 (2026)

Catch-up contribution (age 50 to 59, 64 and over): $7,500 (both years)

Enhanced catch-up (age 60 to 63): $11,250 (2025); $11,250 (2026)

Overall 401(k) additions limit: $70,000 (2025); $72,000 (2026)

SEP-IRA limit: $70,000 (2025); $72,000 (2026)

RMD starting age: 73 for those born after December 31, 1950

QCD annual limit: $108,000 (2025); indexed for inflation

Early withdrawal penalty: 10% additional tax, subject to exceptions

Inherited IRA rule (most non-spouse beneficiaries): Ten-year rule: full distribution by December 31 of year 10

Next: Part 6 covers deductions and credits, including the standard deduction, itemized deductions, the state and local tax cap, mortgage interest, charitable contributions, and the most valuable tax credits available to individual filers.

This article is published by Antravia Advisory. It is for informational purposes only and does not constitute tax advice. Individual circumstances vary and you should seek advice from a qualified practitioner before making decisions that affect your tax position.

About Antravia Advisory

Antravia Advisory is a cross-border tax and advisory firm working with individuals whose tax positions are not straightforward. We support founders, investors, expats, and internationally mobile households who need more than basic tax preparation.

We advise on US individual tax, international reporting, and the interaction between multiple tax systems, including situations involving foreign income, overseas assets, and dual-country obligations. This includes expats living in the United States, US persons living abroad, and families managing financial lives across jurisdictions.

Our work goes beyond filing. We focus on structuring, planning, and ensuring that positions are technically correct, defensible, and aligned across years.

Disclaimer:
Content published by Antravia is provided for informational purposes only and reflects research, industry analysis, and our professional perspective. It does not constitute legal, tax, or accounting advice. Regulations vary by jurisdiction, and individual circumstances differ. Readers should seek advice from a qualified professional before making decisions that could affect their business.

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