Financial Planning for a Peace Corps Volunteer

Dear Dr. Don,

I am 38 years old and joining the Peace Corps. I want to make sure I take enough precautions to preserve my credit rating and retirement account during the 27 months that I won't draw a salary.

I don't plan to return to the economically depressed state where I live and I won't have a job when I exit the Corps. My house, with a current loan balance of $82,000, will be listed, but the odds are it won't sell.

Other than my house, I have zero debt. Beyond my IRA money, I have $60,000 in liquid accounts that I can use to supplement my meager Peace Corps income. So far, I've just been trying to save enough money to contribute to my Roth IRA for the years I'll be gone. I have about six more months to save and there's no way I can even save up two years worth of IRA contributions. What should I focus on, and what kind of accounts should I look for to hold my money?

— Lynn Lifestyle

Dear Lynn,

I didn't know much about the economics surrounding a person volunteering in the Peace Corps. I know this isn't news to you, but for the uninitiated, like me, here's the information the Peace Corps Web site provides about financial benefits:

"The Peace Corps provides volunteers with a living allowance that enables them to live in a manner similar to the local people in their community. Returning from overseas requires some adjustment, so when you complete your service, the Peace Corps provides just over $6,000 toward your transition to life back home. This money is yours to use as you wish: for travel, a vacation, making a move or securing housing."

What I didn't find was any special provisions for Peace Corps volunteers concerning contributions to a Roth IRA. Here's what the IRS says about Roth IRA contributions in Publication 590 Individual Retirement Arrangements:

If contributions are made only to Roth IRAs, your contribution limit generally is the lesser of:

• $4,000 ($5,000 if you are age 50 or older), or

• Your taxable compensation.

However, if your modified AGI is above a certain amount, your contribution limit may be reduced.

You're not going to have to worry about your contribution limit being reduced because your modified AGI is too high, but you do have to figure out what part of your allowance is taxable compensation so that you can contribute up to the value of the allowance. From what I gather, you aren't supposed to spend more than your living allowance in place during service, so you shouldn't need to tap your liquid funds for living expenses on site.

In your shoes, I'd worry more about getting the house sold before you leave. You're not planning on moving back in at the end of your service, and worrying about mortgage payments, taxes, insurance, renters, etc., from a distance sounds like unnecessary stress and headaches.

If you've got six months to sell your house and you don't expect to be able to sell your house, then you're planning to list your house at too high a price. Talk to some real estate agents about your home's fair market value. While you're at it, take a look at an online site such as Zillow.com or Domainia.com.

If you live in a state where you can freeze your credit history, I'd suggest doing that before you start your service. The Bankrate feature, "Does your state allow credit freezes?" provides information on which states allow you to freeze your credit report. If your state doesn't, then consider putting a fraud alert on your credit report instead. Initial fraud alerts expire after 90 days but can be renewed.

If you'll have computer access, then use the provisions of the 2003 Fair and Accurate Credit Transactions Act to get a different credit report every four months from one of the three major credit bureaus -- Equifax, Experian and TransUnion. The Bankrate feature, "How to get your free credit report," provides the contact information.

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