After the Storms

It has been a wicked year for weather disasters. Will this year’s record-breaking floods and the unusually high number of storms and tornadoes cause homeowners insurance rates to rise for policyholders all across the country? — A. L., via e-mail

Flood damage is not covered by homeowners insurance, so the mass destruction along the Mississippi and its tributaries will not affect those rates. But, depending on where you live, the other disasters could trigger higher rates. Average homeowners insurance rates rose by about 5% last year and are likely to rise at the same rate in most areas that haven’t been affected by this year’s severe weather. Residents of areas where there have been a lot of claims are likely to see their rates go higher.

Although tornadoes have received the most attention recently, 2011 is the fourth year in a row that insurers have paid out substantial claims for thunderstorms, hail, lightning and high winds. These claims tend to be in the Midwest, a part of the country that normally has lower-than-average homeowners insurance rates -- particularly in comparison with hurricane-prone coastal areas. Homeowners in parts of the Southeast -- Alabama, Arkansas, Georgia, Kentucky, Missouri and Tennessee -- affected by storms will likely see the largest increases when their policies come up for renewal in the next two years (insurers need to develop new rates and get regulators to approve them before passing them on to policyholders).

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Flex funds for child care

When I made my flexible spending account contribution for dependent care, I may have overestimated my expenses. What happens if I’m not able to spend my full $5,000 contribution by the end of the year? Can I change my contributions midyear? — Kristin Gustafson, Woodridge, Ill.

You usually can’t change your FSA contributions midyear without a qualifying life-changing event, such as marriage, the birth of a child or the death of a dependent. And you’ll lose any money you don’t use by the end of the plan year. But you may be able to use the FSA money for more expenses than you realize. As long as your children are under age 13 and you need child care so you can work or look for work (or so one parent can attend school full-time), you can use the money for care or special programs before or after school, a nanny or babysitter, and even to pay the cost of day camp during the summer and school holidays. School tuition (beyond preschool) and overnight camp do not qualify.

Roth IRA do-over

I converted my traditional IRA to a Roth last year, but I have since changed my mind about the conversion. Is it too late to switch it back to a traditional IRA and avoid the tax bill? — Troy Cornick, Maple Grove, Minn.

It’s not too late to undo a 2010 Roth IRA conversion. You have until October 17, 2011, to change the account back to a traditional IRA (technically called recharacterization) and get back money you’ve paid in taxes on the conversion or avoid paying the tax bill. Among the reasons to undo the conversion: The value of your investments decreased after you converted the account to a Roth and you don’t want to pay tax on the higher account balance, or you don’t have the money to pay the taxes you owe.

To undo a Roth conversion, contact your IRA administrator and ask to recharacterize the account back to a traditional IRA. If you already paid the tax bill, file an amended return (using Form 1040X, available at www.irs.gov) to get a refund. Or, if you had planned to split your tax bill between your 2011 and 2012 returns, as allowed by a special provision for 2010 Roth con­versions only, you can avoid paying the tax bill by recharacterizing your Roth conversion before October 17.

Fly-or-drive calculator

With gas prices so high, I’m trying to figure out whether it is cheaper to drive or fly on my next vacation. Any suggestions? — S.R., Chevy Chase, Md.

Yes. There is a new tool at www.befrugal.com/tools/fly-or-drive-calculator that helps you figure whether it’s more economical to fly or drive. The calculator asks you to supply details about both options—including the model and year of your car, and the cost of a hotel stay on the way (if needed)—and can automatically estimate the cost of the flight. The calculator also factors in often-overlooked costs, such as transportation to and from the airport, parking at the airport, any extra baggage fees, and even wear and tear on your car (but you’ll have to add in rental-car costs). You’ll immediately see the total costs for both options.

Overdosing on employer stock

I need advice on investing in my 401(k). I favor an aggressive approach, so I’ve invested 50% of my 401(k) in the stock of my employer, Abbott Laboratories, and the rest in various mutual funds. Could you help? —Y.C., Arecibo, P.R.

Putting 50% of your 401(k) into your employer’s stock is way too risky, even for the most aggressive investors. Abbott, a diversified producer of drugs and other medical products, is a fine company. It has increased its earnings for 39 consecutive years; it has boosted its dividend for 39 years in a row, too. And there’s something to be said about making a big bet on the company you should know best.

But with such a large concentration in a single stock, too much of your financial life -- half of your retirement assets and all of your job income -- is tied to the health of one company. If Abbott were to get into serious trouble for any reason, you could lose both your job and a substantial part of your retirement savings (just ask the folks who used to work for Enron). In general, you should limit employer stock to about 10% of your 401(k) plan. You could stretch that rule a bit if you have significant retirement assets invested in other accounts.

Social Security benefits for divorcées

My mom was married to my dad for 27 years before they divorced. She was a stay-at-home mom most of their marriage and didn’t return to work until after the divorce. She has since remarried. Someone told her that she is not eligible for retirement benefits based on my dad’s work record because she remarried before age 60. Is that true? Her current husband is not yet retired. — David Schulz, Houston

That is correct. Although your mother would have qualified for Social Security retirement benefits based on your father’s earnings record because she was married to him for more than ten years, she lost that right when she remarried. She cannot collect benefits on your father's work record unless her current marriage ends in divorce, annulment or because of the death of her current husband. You may be confusing a different rule that applies to widows and widowers. They can collect Social Security benefits based on their late spouse's work record even if they remarry as long as they wait until at least age 60 to do so. In those cases, for example, a widow could choose to collect spousal benefits based on her former husband’s record or current husband’s, whichever was higher.

If your mother does not have enough credits on her own earnings record -- generally ten years of covered work -- she will have to wait until her current husband begins collecting retirement benefits to qualify for spousal benefits. Her benefits are worth half of his benefit amount, assuming she is at least 66, or normal retirement age, at the time.

Special thanks to my colleagues Jennifer Schonberger and Mary Beth Franklin for their help this month.