Print

Transcripts

How to save for retirement using IRAs?

Bill Gerhard: Hi! I am Bill Gerhard, Director of Financial Services for AAA. I am talking about how to save for retirement using IRAs. IRAs were created to encourage savings for retirement, so there are penalties to discourage early withdrawal. Let's look at withdrawals rules and penalties you need to understand before investing in an IRA.

You can begin by taking money out of your traditional IRA without a federal tax penalty when you are 59-and-a-half-years old. If you take money out of your traditional IRA before your age 59-and-a-half, you will pay a penalty currently 10% and all taxes on the money which is considered additional ordinary income. You must begin taking Required Minimum Distributions by age 70-and-a-half to avoid penalties for a traditional IRA. Your total distribution is taxed as ordinary income.

In some very specific situations, you may withdraw a specific amount from your IRA without penalty if you need certain IRS criteria for home ownership, medical expenses or education, for example.

Always consult a financial planner or tax consultant to make sure you qualify for an exemption. A Roth IRA has different eligibility rules than a traditional Individual Retirement Account.

You can contribute to a Roth IRA at any age if you have earned income, such as salaries, professional fees or bonuses. There is no mandatory distribution at age 70-and-a-half. There is no distribution age requirement. If your Roth IRA has been opened for at least five years, distributions are not subject to federal taxation on your contribution or federal penalties.

Like a traditional IRA, the amount you can contribute to a Roth IRA each year is limited. Currently, the limit is $5,000 per year or $6,000 if you are over the age of 50.

You can contribute to a Roth IRA at any time for a given calendar year, up to the time you file your taxes. For example, you could make a contribution for the current tax year between January 1st of that year and April 15th of the following year.

As of this year, you are allowed to make an additional contribution of $1,000 if you are age 50 or older. These are called catch-up contributions. Your income may vary, tax regulations change annually. Before you make decisions about opening a new IRA or making contributions or withdrawals, do your homework. A financial planner or tax consultant can help you avoid penalties and optimize your investment for a worry-free retirement.

AAA offers the information in this video series for educational purposes only. Carefully consider objectives, risks, expenses and tax implications before investing.

The next video in this series will explain to you how to roll over or transfer an IRA, which means moving your savings from one custodian to another.

1