General Question

trailsillustrated's avatar

I am receiving a settlement shortly. What is an IRA?

Asked by trailsillustrated (16352points) November 28th, 2011

So my divorce has come to terms and I can go home. A bulk of the money must be put into an IRA. I don’t know what this is, and I will be in Australia. Will I be able to access it? What exactly is it? And where do I find a broker for it? Any help much appreciated.

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14 Answers

creative1's avatar

An IRA is an Individual Retirement Account, you would contribute towards your retirement, I don’t know the tax implications of it if you withdraw when you are in Austrailia but I found this site that might be able to help you

trailsillustrated's avatar

Thanks @creative1 reading it now

marinelife's avatar

You really should not access th money in an IRA early. the penalties are prohibitive, and you will need the money for when you retire. There are U.S. tax implications as well.

CWOTUS's avatar

In the USA, an IRA is short for “Individual Retirement Account”. This is a tax-advantaged investment account designed (obviously) to accumulate wealth to be paid at or near a person’s retirement from the work force.

In general, there are two major types of IRA, the “traditional” account, in which investment into the account is made with wage earnings that are not taxed, thereby reducing a person’s taxable income in the year earned. In this account, taxes are paid on distributions from the account, which under the plan may occur after years – potentially decades – of tax-free growth. In the other type of IRA, the “Roth” IRA (named for the senator who first sponsored it, I believe), the contributions to the account are made after tax has been paid on the earnings themselves. In this account, I believer there is no further tax liability.

In each type of account, there is no accounting for annual earnings for taxation purposes. That is, the earnings in the account from year to year are free from taxation, and only the distributions on the “traditional” IRA will be taxed when they are redeemed by the account holder.

trailsillustrated's avatar

So could you point me in the right direction to open one of these? Thankyou you people are awesome. I am a bit afraid as I am going home asap. Will it take a long time to set this up? Must I maintain a US bank account for this?

CWOTUS's avatar

The simplest way to do it is with a stock broker. That gives you a lot more investment options. Banks “can” do stock investments, but don’t often do it as well. If you have an IRA with a stock broker (any discount full service brokerage) will give you the option to trade online from anywhere in the world.

I’ve had IRAs with Charles Schwab for many years, but others are just as good, if not better.

You can set the account up in next to no time.

wundayatta's avatar

Probably you have to put this money into an IRA because it comes from your ex-husband’s retirement accounts. What you should do is call Vanguard and set up the account with them. They will walk you through everything. They will answer all your questions. They will set it up and send you the paperwork to sign. They will also help you figure out what to invest it in.

At first, you want all the money in a money market account. Vanguard has a decent one. None are paying much interest these days. Then, as you research investing and figure out where you want to invest, you can do it all online. Invest in mutual funds. If you don’t want to think about anything, invest in the STAR fund or the Asset Allocation fund. Both are well diversified and fairly conservative, but experience good returns, on average.

Use Vanguard because they keep the costs of investing very low. They do not actively manage accounts, which keeps costs low. They use automatic investment strategies, so there is not a lot of jiggering going on with investment managers. You are not buying and selling all the time.

If, at some point, you decide you are more interested in managing your money, then you can start investigating other mutual funds to invest in. I would stay away from purchasing individual stocks until you are very sure you understand what you are doing. If you don’t know what a mutual fund is and you don’t want to know, use the STAR fund or Asset Allocation and forget about it. If you have a lower tolerance for risk, then keep it in Treasury Bonds or even in Money Market accounts, although the latter are not as safe as they once were, and even the former are not the solid bets they used to be.

But I would rely on one of the two funds I mentioned because then you are in stocks and bonds, and you have a little more risk, but the old conservative investments are not nearly as stable as people used to think, so there’s no point in staying out of the stock market. But the safest way to invest is through a mutual fund that is well diversified, as the two funds I mentioned are.

Bellatrix's avatar

Given how important this money will be to your future. If it were me, I would speak to an independent financial expert. Someone who will know how you will be able to access this fund in Australia or if you can set up a fund in Australia. Whether you can access the funds before retirement if you absolutely have to. I am sure you must have a million questions. Glad this is resolved for you now and that you can move on with your life.

Skaggfacemutt's avatar

I am not convinced that an IRA is the way to go. You still have to pay taxes on that money, and by the time you retire, taxes could be through the roof. I am no investment genius, but I just don’t see the advantage.

wundayatta's avatar

@Skaggfacemutt If it’s in a retirement fund now, she has no choice but to keep it in such a financial instrument as an IRA or to forfeit an 10 or 15% in addition to the taxes she has to pay. Some people who need the money do that, but most people don’t want to pay that price. We put money into retirement funds and the government supports that by offering us a gamble on what tax bracket we will be in when we retire. Most of us take a pay cut when we retire. We should be so lucky as to have enough retirement money that we still fall into a tax bracket the same as we had when we were working.

But it’s too late now. But this doesn’t mean a person has to keep contributing to a retirement fund. The government wants to encourage saving so people don’t fall into poverty when they no longer work. The advantage in terms of increased income is dubious, but if you have a reduced income at retirement, it is likely you will be taxed less on those earnings. Although, as you say, tax rates could rise by then. There are many unknowns. They could also fall.

Skaggfacemutt's avatar

@wundayatta I see – I was referring more to whether putting it in a retirement account was a good idea to begin with. I just would rather have my retirement money in a regular savings account.

My sister is in the same dilemma. She has a sizeable sum in her retirement account and owes about the same on her house. She is retired now, but if she takes the money out of her retirement account to pay off her house, she will take such a hit on taxes that there really wouldn’t be enough to pay off her house. Hmmmm.

wundayatta's avatar

@Skaggfacemutt You can put your money in a very conservative investment inside an IRA. You could do a money market account. You could invest in state or federal bonds. Some of these things are considered safer than bank savings accounts.

As to your sister, she is probably better off not paying off the house all at once. If she takes the money out in small amounts every year, then she’ll be in a lower tax bracket and pay less. She should take out the least money every year that she can to cover her expenses. There’s no point in getting money out of the retirement protection that I can see. I think you always have full access to the money. So leave any money you don’t need in the IRA. Let your kids pay taxes on it if there’s any left when you pass on.

Skaggfacemutt's avatar

Thanks, @wundayatta . I will have to suggest that strategy to my sister. As for me, I do have my retirement savings in a money market, so I guess I’m doing okay.

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