Question: I am a 50-year-old recently divorced woman whose sole income is alimony. I have no earned credits for Social Security, and am too disabled to go to work now. I understand I am precluded from having an IRA account even though my alimony is fully taxable. What can I do to help provide for future years?
Answer: You're right about not being eligible for an IRA based on your alimony payments, unless your husband had started a spousal IRA for you at least five years before your divorce.
But the principal advantage to an IRA is the tax deferral feature. I don't know the amount of your alimony. But I presume, since that's your only income, that you're in a fairly low tax bracket.
You can still invest the money that you would put into an IRA into the same kinds of investments you would make with your IRA money. At your age these should be conservative--a money market fund, saving institution certificates, perhaps a good bond mutual fund.
Tax deferral on earnings (one part of the IRA tax advantage) can be achieved by buying a couple of good utility stocks. With minor restrictions, you can defer the tax on up to $750 a year on utility dividends that are reinvested on additional shares of the same utility under a company dividend reinvestment plan.
Talk to your friendly neighborhood stock broker. He or she can suggest a couple of good solid utility stocks with a record of regular dividend increases and whose dividends qualify for the deferral.
And while you're there ask about a deferred insurance annuity, which also provides for tax deferral on retained earnings until withdrawal.
All may not be lost in the Social Security area either. If you were married for at least 10 years before your divorce, you will qualify (at age 62) for a spouse's benefit when your former husband starts to draw his Social Security--even if he has remarried.
Q: I have a personal bank savings account with about $1,500 in it. I would like to transfer about $1,000 to a money market fund, but my husband is in the 50 percent tax bracket and doesn't want me to "muddy the waters" with what little I would earn on my $1,000. Is his request reasonable?
A: At the risk of stepping into the middle of a marital disagreement, I have to say that he is being unreasonable in this case.
There is absolutely no difference in the amount of paperwork involved in reporting 5 1/4 percent interest income from a savings account and reporting 12 percent income from a money market fund; and there would be no increased exposure to a tax audit.
Of course, the amount of tax due would be greater. But under ERTA (the 1981 tax act) the maximum tax bracket is 50 percent with no distinction between earned and unearned income, so there is no chance that your extra interest would move you into a higher tax bracket.
The number of dollars is small, but the principle is valid. Even after paying federal income tax you'll have $60 left instead of $27--without muddying the waters or causing any additional tax problems.
Q: If I buy municipal bonds for cash but also have a margin account for stocks, will the interest deduction for the margin account be questioned?
A: Not if you keep the transactions separate, either by having a cash account and a margin account at your broker or buying the bonds in separate transactions (for which you pay cash) outside of your account.
But if you commingle the funds and the transactions in one account, then the margin account interest--to the extent of the amount applicable to the margin portion of the bond purchases--would not be deductible on your tax return.