On money

Soon-to-be divorcee tries to secure her financial future

Personal Finance editor HELEN HUNTLEY E-mail: Click here Archive

By HELEN HUNTLEY, Times Staff Writer

© St. Petersburg Times
published December 23, 2001

Q. After 20 years of marriage, I am divorcing and will receive title to the house with a mortgage I can just handle plus half the profit-sharing retirement account from my ex-husband's job. Is it possible to move these funds to an account where I could avoid a big tax and still have access to those funds quickly if I needed the money? I have a low-wage job with no health insurance.

A. If you will not need the money right away, a Qualified Domestic Relations Order, known as a QDRO, should be used to divide the retirement account without any income tax consequences. By moving this money into your own individual retirement account, you can delay taxes until withdrawal. Talk to the lawyer handling your divorce about this.

The best way to invest the money depends on the amount of money involved, your age and your tolerance for risk. Most likely some of it should be invested for the long term, probably in stock mutual funds, and some of it should be invested for the short term, perhaps in money market funds or certificates of deposit. The short-term money is the money you would tap in case of emergency, but if you keep all your money in short-term investments, your return will be very low.

You also should take a hard look at the pros and cons of keeping your house, especially since you indicate that you can barely afford the mortgage. Often women want to keep the house after a divorce, but would be better off financially if they sold it and bought a less expensive house or rented. Sometimes it also is beneficial emotionally to move and put the past behind you.

Q. I have a $25,000 IRA coming up for rollover next month. My broker suggests that I move this into a corporate bond fund. I am skittish about anything remotely connected with "the market." I have no market savvy and stay with all Standard & Poor's AAA-rated insurance companies for my investments. My broker says corporate bond funds are safe. Do you agree? Do bond funds have a rating system?

A. All types of bond funds fluctuate in value as interest rates fluctuate. When rates go down, bond fund share prices go up. When rates go up, share prices go down. Predicting future interest rates is not easy, but with rates near historic lows, odds are that they will go up rather than down.

Corporate bond funds carry additional risks. One is the possibility that some of the bonds in the portfolio will end up in default, a particular threat in a weak economy. Corporate bond defaults are at record levels. The other problem is that corporate bonds often take a beating when investors get skittish about risk. Both these possibilities are bigger problems for high-yield bond funds than for those that only buy investment-grade bonds.

Morningstar (www.morningstar.com) rates stock and bond funds for performance and risk. Standard & Poor's Corp. (www.standardandpoors.com) provides credit ratings and volatility ratings on money market and bond funds, but they are only available for a limited number of funds. (To find them, click on "ratings actions," then on "managed funds," found under "ratings lists.")

Q. My husband died this year after having already taken the required 2001 distribution from his IRA. I turned 70 1/2 this year. Do I have to take another distribution for 2001 if I treat these IRAs as my own?

A. No. A second distribution for 2001 is not required. You have until Dec. 31, 2002, to take your distribution for 2002.

Q. I am taking required withdrawals from my individual retirement account. Last year I withdrew twice as much as the required minimum. Can I reduce the withdrawal for this year based on last year's extra withdrawal?

A. No. I'm afraid that is not the way it works.

CORRECTION: The unified credit for gift and estate taxes will be $1-million in 2002. Last week's column listed an incorrect amount.

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-- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

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