Bill Gerhard: Hi! I am Bill Gerhard, Director of Financial Services for AAA. An individual retirement plan is an investment that allows you to save for retirement. Let's get started by defining the different types of IRAs and who can open one. There are two main types of IRAs, the Traditional IRA, and the Roth IRA, they each have advantages.

You can open an IRA if you are under 701/2 years old, in the year that you open the IRA. You must also receive taxable earned compensation, interest from investments, bank accounts etcetera, does not qualifies compensation.

You must receive a W-2 or documentation of self employment and come to qualify. You may have multiple IRAs at different institutions, such as banks, credit unions, savings and bonds, brokerage firms and insurance companies.

You may also want to check offerings from certain groups such as AAA, who have made special arrangements with banks and insurance companies. According to current tax law your total maximum annual contribution cannot exceed $5,000 or $6,000 for people over the age of 50.

But tax law has changed, so verify the amount of contributions allowed with the tax expert prior to making any contribution. There are several types of IRAs, we'll focus on the most popular options. The Traditional IRA and the Roth IRA.

Traditional IRA contributions are tax deductible, because the contributions are made with pre-tax dollars. You can begin taking distributions without a federal tax penalty when your are 591/2. However, depending on your investment choice they may impose a penalty.

The IRAs requires you to begin taking required minimum distributions by age 701/2 to avoid penalties. Your distributions are taxes ordinary income. In very specific situations you may be allowed to take early withdrawals from a Traditional IRA without a federal tax penalty.

In addition to, or in place of a Traditional IRA, you may consider a Roth IRA. A Roth IRA also has tax advantages for savers, but as different eligibility rules and benefits, you may contribute to a Roth IRA at any age, as long as you have earned compensation.

There are catch up and conversion options you may want to look into. Unlike a Traditional IRA, you fund a Roth IRA with after tax dollars. Your contributions and earnings are tax free as they accumulate, and when you take your distributions, your contribution is not taxed, just your earnings.

There are no mandatory distributions at age 701/2, qualify distributions can be withdrawn after the plan has been open for five years with no federal penalty. Federal tax laws and regulations encourage almost everyone to contribute to a tax advantage retirement savings account.

However, the type of IRA that would best help you meet your finance goals depends on your age, family status, participation in other retirement or pension plans, and your overall taxable income.

Talk with a financial professional or tax consultant before you make large or long term financial commitments. AAA offers the information in this video series for educational purposes only. Carefully consider objectives, risks, expenses and tax implications before investing. Next, we'll focus on the Traditional IRA.

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