Retirement and Education Accounts: Traditional vs Roth, 401(k), and 529

Search “Roth vs Traditional IRA” and you’ll get a thousand articles answering a question the SIE never asks: which one should I use?

The exam asks something different. What kind of security is this, who regulates it, and how are the distributions taxed? Those are securities questions, and they have precise answers.

The clearest example: a 529 plan. Every personal finance site calls it a college savings account. The SIE calls it a municipal fund security, regulated by the MSRB, sold with an official statement rather than a prospectus. Same product, completely different frame — and the exam tests the second one.

This is the structural version. Very few dollar figures, because contribution limits change annually and the SIE doesn’t test them.

The short answer

The organising distinction is qualified versus non-qualified.

	Qualified	Non-qualified
Contributions	Pre-tax (deductible)	After-tax
Cost basis	Zero	The amount contributed
Distributions taxed	Entirely as ordinary income	Earnings only
Examples	Traditional IRA, 401(k), 403(b)	Roth IRA, non-qualified annuities

That cost basis row is the whole thing. If you never paid tax going in, everything coming out is taxable. If you paid tax going in, only the growth gets taxed.

Traditional vs Roth IRA:

	Traditional	Roth
Contributions	May be deductible	Never deductible
Growth	Tax-deferred	Tax-deferred
Qualified withdrawals	Taxed as ordinary income	Tax-free
Income limits to contribute	No	Yes
RMDs during your lifetime	Yes	No

Education accounts: a 529 is a municipal fund security with high limits and no income restrictions. A Coverdell ESA is capped at $2,000 a year and phases out by income.

The number nearly every guide gets wrong: the RMD age isn’t 73 for everyone. It’s 72, 73, or 75 depending on birth year.

The full answer

Why cost basis is the key

Every retirement account question reduces to one thing: did you already pay tax on this money?

Qualified plans — Traditional IRA, 401(k), 403(b) — take pre-tax contributions. You got a deduction, so the government hasn’t taxed that money yet. Your cost basis is zero, and every dollar withdrawn is ordinary income.

Non-qualified — Roth IRA, non-qualified annuities — take after-tax contributions. You’ve already paid tax on the principal, so your basis equals what you put in. Only the growth is taxable, and in a Roth’s case, qualified withdrawals aren’t taxed at all.

Get the basis right and the tax treatment follows automatically. There’s nothing else to memorise.

Traditional IRA

Anyone with earned income can contribute. Deductibility is a separate question — it depends on income and whether you’re covered by a workplace plan.

Distributions are taxed as ordinary income, never as capital gains. That surprises people: the growth inside an IRA loses its capital gains character.

Before age 59½, withdrawals carry a 10% early distribution penalty on top of ordinary income tax. Exceptions include death, disability, qualified first-time home purchase, qualified education expenses, and substantially equal periodic payments.

RMDs apply during your lifetime, on a schedule set out below.

The SECURE Act removed the old age cap on contributions in 2020. You can now contribute at any age, provided you have earned income.

Roth IRA

Contributions are never deductible. In exchange, qualified distributions are entirely tax-free — principal and growth.

A distribution is qualified when two conditions are met:

1. The account has been open at least five years, and
2. You are 59½ or older, disabled, deceased, or making a qualified first-time home purchase

Contributions can be withdrawn at any time, tax-free and penalty-free, because you already paid tax on them. Only earnings face the five-year and age tests. This is a genuine structural difference from a Traditional IRA, where nothing comes out cleanly before 59½.

Roth IRAs have income limits to contribute — the eligibility phases out as income rises. Traditional IRAs have no income limit to contribute, only to deduct.

No RMDs during the owner’s lifetime. The money can sit indefinitely.

Employer-sponsored plans

Defined benefit — a pension. The employer promises a specified benefit and carries the investment risk.

Defined contribution — a 401(k), 403(b), or profit-sharing plan. Contributions are defined; the eventual benefit isn’t, and the employee carries the investment risk.

Plan	Who offers it
401(k)	For-profit corporations
403(b) / TSA	Public schools, hospitals, 501(c)(3) non-profits
457	State and local government employers
SEP IRA	Small employers and the self-employed
SIMPLE IRA	Employers with 100 or fewer employees

ERISA — the Employee Retirement Income Security Act of 1974 — governs private-sector plans, setting standards for participation, vesting, funding, and fiduciary conduct. It does not cover government or most church plans.

One change worth knowing: Roth 401(k) and Roth 403(b) accounts were subject to RMDs until 2024, when SECURE 2.0 eliminated them. That aligned the Roth 401(k) with the Roth IRA. Material published before 2024 says otherwise.

529 plans: a municipal fund security

This is the framing that matters for a securities exam.

A 529 is not a mutual fund and not a bank product. It’s a municipal fund security, issued by a state or state agency and regulated by the MSRB. It’s sold with an official statement, not a prospectus, and the rep selling it needs the appropriate registration.

The characteristics:

• No income limits on the account owner
• High contribution limits, set by the state plan
• Tax-deferred growth; withdrawals for qualified education expenses are federally tax-free
• The account owner keeps control — not the beneficiary. The owner can change the beneficiary to another qualifying family member
• Possible state tax deduction, depending on the state and plan
• Non-qualified withdrawals face income tax plus a 10% penalty on earnings

The five-year gift election lets a contributor front-load five years of annual gift tax exclusions into a single year for one beneficiary, without triggering gift tax.

The 529-to-Roth rollover

SECURE 2.0 added this, effective for distributions after December 31, 2023. It solved a real problem: money left over after a scholarship or a cheaper school used to be stuck, with tax plus a 10% penalty on earnings as the only exit.

The conditions are narrow, and all of them must be met:

Requirement	Detail
Lifetime cap	$35,000 per beneficiary
Account age	529 open at least 15 years
Lookback	Contributions from the last 5 years are ineligible
Annual cap	That year’s IRA contribution limit, reduced by the beneficiary’s other IRA contributions
Roth ownership	Must be owned by the 529 beneficiary, not the account owner
Earned income	The beneficiary needs compensation at least equal to the rollover
Method	Direct trustee-to-trustee transfer

Two features worth noting: Roth income limits don’t apply to these rollovers, so a high-earning beneficiary who couldn’t otherwise contribute to a Roth still can. And changing the beneficiary likely restarts the 15-year clock.

Coverdell ESA

The other education account, and much more limited:

	Coverdell	529
Annual contribution	$2,000 per beneficiary	High, set by the plan
Income limits on contributor	Yes	No
Contributions allowed until	Beneficiary turns 18	No age limit
Funds must be used by	Beneficiary turns 30	No deadline
Investment choice	Wide — you self-direct	Plan menu only
Security type	Not a municipal fund security	Municipal fund security

Coverdells trade flexibility of investment for severe limits on size. Most families use 529s for that reason.

UGMA and UTMA custodial accounts

Not retirement or education accounts specifically, but they turn up alongside them.

An adult custodian manages assets for a minor. The critical feature: the gift is irrevocable. The assets belong to the child immediately and permanently. The custodian manages them but cannot take them back or redirect them to another child.

At the age of majority, control transfers to the beneficiary, who may use the money for anything. Unlike a 529, there’s no education requirement and no ability to change the beneficiary.

RMDs: the number that isn’t one number

Nearly every guide says the RMD age is 73. It depends on when you were born.

Born	RMD age
1950 or earlier	72
1951 – 1959	73
1960 or later	75

The history: the SECURE Act moved it from 70½ to 72 in 2020. SECURE 2.0 moved it to 73 effective January 1, 2023, with a further step to 75 arriving in 2033.

Timing: the first RMD is due by April 1 of the year after you reach your RMD age. Every subsequent one is due by December 31. Deferring the first means taking two in the same calendar year.

Penalty for missing one: 25% of the shortfall, reduced to 10% if corrected within two years. SECURE 2.0 cut this from 50%.

Roth IRAs have no RMDs during the owner’s lifetime. Neither do Roth 401(k)s, since 2024.

Inherited accounts: the stretch is gone

The SECURE Act eliminated the “stretch IRA” for most non-spouse beneficiaries who inherit from someone who died after 2019.

Previously, a beneficiary could spread distributions across their own life expectancy — potentially forty years of continued tax deferral. Now most non-spouse beneficiaries must empty the account within 10 years.

IRS final regulations issued in July 2024, effective for the 2025 distribution year, settled a question that had confused even professionals: where the original owner died on or after their required beginning date, the beneficiary must take annual RMDs in years 1 through 9 and empty the account by the end of year 10. The 10-year rule isn’t just a deadline; it comes with annual obligations attached.

Eligible designated beneficiaries are exempt from the 10-year rule and may still stretch: surviving spouses, minor children of the account owner (until majority), disabled or chronically ill individuals, and beneficiaries not more than 10 years younger than the owner.

Why annuities sit next to this material

Fixed annuities are insurance products. Not securities. No registration needed to sell one beyond an insurance licence.

Variable annuities are securities, because the customer bears the investment risk. They require registration, a prospectus, and a licensed rep. FINRA Rule 2330 imposes additional suitability requirements on deferred variable annuities — and notably, that rule survived the Reg BI amendments intact.

That distinction shows up constantly, and it’s the same logic as the exempt securities material: who bears the investment risk determines whether something is a security.

Common misconceptions

“The RMD age is 73.” It’s 72, 73, or 75 depending on birth year — and rising to 75 for everyone born 1960 or later.

“A 529 is a type of mutual fund.” It’s a municipal fund security, MSRB-regulated, sold with an official statement rather than a prospectus.

“Roth 401(k)s require RMDs.” They did until 2024. SECURE 2.0 eliminated them.

“IRA growth is taxed as capital gains.” Distributions from a qualified plan are ordinary income. The capital gains character is lost.

“You can’t touch a Roth before 59½.” You can withdraw contributions at any time, tax and penalty free. The restrictions apply to earnings.

“Traditional IRAs have income limits.” Not to contribute — only to deduct. Roth IRAs have income limits to contribute.

“An inherited IRA can be stretched over my lifetime.” Not since the SECURE Act, unless you’re an eligible designated beneficiary. Most non-spouse beneficiaries face the 10-year rule.

“The 10-year rule just means empty it by year 10.” If the owner died on or after their required beginning date, annual RMDs are also required in years 1 through 9.

“A custodial account can be moved to another child.” No. UGMA and UTMA gifts are irrevocable and belong to that beneficiary.

“Annuities are securities.” Variable annuities are. Fixed annuities aren’t.

What to do with this info

1. Start every question with cost basis. Pre-tax in means fully taxable out. After-tax in means only the growth is taxed.
2. Learn the 529 as a municipal fund security, not as a savings account. That’s the framing the exam uses and the one general finance sites never give you.
3. Don’t memorise contribution limits. They change annually and the SIE tests structure, not dollar caps.
4. Do memorise the structural numbers: 59½, the 10% early penalty, the Roth five-year rule, and the 10-year inherited rule.
5. Keep the variable/fixed annuity line sharp. Who bears the investment risk decides whether it’s a security.
6. Check your material’s publication date. Anything predating 2024 will have Roth 401(k) RMDs, a flat RMD age, and possibly the stretch IRA — all wrong now.

Related resources

• Exempt securities vs exempt transactions — why fixed annuities are exempt and variable annuities aren’t
• The SIE exam glossary — 170 terms in plain English, including the account vocabulary above
• Every number and formula on the SIE — the structural figures worth memorising
• Suitability, KYC and Reg BI — the standards governing a recommendation to roll over a retirement account
• How to read SIE exam questions — spotting the cost basis cue in a taxation scenario
• Taxation basics for the SIE — cost basis, holding periods, wash sales, and how interest is taxed
• Free SIE practice exam — a domain-scored diagnostic