Kimberly Lankford explains how to buy Australian bonds, how to get a better tuition tax break and more.
The Australian government recently issued some inflation-linked bonds. I’m interested in diversifying my dollar exposure, and the inflation-protection feature sounds appealing. Can I still buy them? -- N.O., Bethesda, Md.
You haven’t missed the boat. The Securities and Exchange Commission imposes a 40-day waiting period before newly issued foreign bonds can be sold to U.S. investors, so you couldn’t have purchased these bonds at issue anyway.
The best way to buy foreign bonds directly is through EverTrade, the brokerage arm of EverBank. EverTrade’s foreign-bond trader says he will have no trouble buying the bonds by the time you read this article. You’ll have to purchase a minimum of $20,000 worth of the bonds, and the price you pay folds in EverTrade’s commission.
These particular bonds pay annual interest of 3% in quarterly installments. But their principal value (and therefore the actual dollar amount of their interest payments) is indexed to the Australian consumer price index. At their initial offering, the Aussie bonds, which mature in 2025, were priced to yield 3.04% to maturity. If the greenback strengthens against the Australian dollar, your investment will decline in value in U.S.-dollar terms. Or you could earn additional profit if the dollar weakens.
If your primary goal is diversification, consider a fund that provides exposure to a variety of currencies. Australia is a large exporter of commodities, so its currency tends to move in step with commodity prices. For broad diversification and a low minimum price tag, take a look at SPDR DB International Government Inflation-Protected Bond (symbol WIP). This exchange-traded fund invests in a basket of foreign-government-issued, inflation-linked bonds. It recently yielded 1.5%.
A better tuition tax break
Has the tuition-and-fees federal tax deduction been renewed? If not, what would be the best strategy for me? -- Garrett Guillotte, Lafayette, La.
The tax deduction covering up to $4,000 in tuition and fees still exists, but the American Opportunity Credit, introduced as part of the stimulus package, is a better option. It is a turbocharged version of the Hope credit, which the government offered previously, with higher income limits and bigger tax breaks. And it now covers four years of college rather than just the first two. It’s available for 2009 and 2010.
A tax credit, which reduces your tax bill dollar for dollar, is more valuable than a tax deduction, which merely reduces the amount of your income that is taxed. You may qualify for an American Opportunity Credit of up to $2,500 as long as you spend at least $4,000 in tuition and qualified expenses (including fees, books and related course materials). And if your credit exceeds your tax liability, you may receive a refund check (up to $1,000 more than your tax bill). You qualify for the American Opportunity Credit if your income is less than $90,000 for singles and $180,000 for joint filers.
By contrast, the maximum $4,000 tuition deduction would lower your tax bill by just $1,000 if you were in the 25% federal tax bracket. The tuition-and-fees deduction has lower income limits than the American Opportunity Credit, but it is available for graduate-level expenses not covered by the credit. Individuals with incomes up to $65,000 ($130,000 for married couples) qualify for the full $4,000 deduction. Individuals with incomes between $65,000 and $80,000 (between $130,000 and $160,000 for married couples) are eligible for a $2,000 deduction.
Roth income limits
I know that the income limits for converting a traditional IRA to a Roth were eliminated for 2010. But have the income limits for contributing to a Roth IRA vanished as well? -- Barry Fretz, Boyertown, Pa.
No, the income limits still exist. You can contribute the full $5,000 to a Roth IRA (plus an extra $1,000 if you’re 50 or older) only if your modified adjusted gross income is less than $105,000 if single or $167,000 if married filing jointly. The amount you’re allowed to contribute disappears entirely if you’re single and earn more than $120,000 or if you’re filing jointly and earn $177,000.
But you can contribute to a traditional IRA and then immediately convert to a Roth regardless of your income because there is no longer an income limit for conversions in 2010 (see The Lowdown).
If you already have a traditional IRA, you can’t simply put the $5,000 into a non-deductible IRA, then move it tax-free to a Roth. The tax-free part of the conversion is based on the ratio of nondeductible deposits in all of your traditional IRAs to the total balance in those accounts (contributions -- deductible or not -- and earnings). The rest of the conversion would be taxed.
Life insurance after cancer
I had stage 2 breast cancer and underwent an operation, chemotherapy and radiation therapy. My treatment ended in 2007, and I haven’t had evidence of cancer since. I was turned down for life insurance a few months ago. Is there a company that will cover me? -- L.M., via e-mail
There may be. It’s a lot easier for people who have had certain types of cancer to get life insurance now, both because of better treatment success rates and because a few insurers are looking a lot more carefully at the severity of the cancer and the kind of treatment received. For example, Hartford Life offers life insurance at standard rates to some people right after they finish their treatment for breast or prostate cancer.
But you need to meet specific requirements to qualify for coverage that early. To get Hartford’s standard rates, for example, a breast-cancer survivor must be age 40 or older, have had a small, localized stage 1 breast cancer, and have a strong prognosis for survival. Because yours was stage 2 breast cancer, Ann Hoven, M.D., chief medical director for Hartford Life, believes you might qualify for a policy with Hartford in as little as three years after your last treatment, depending on the severity of the cancer. The policy would probably cost more than the standard rate, but sometimes the company drops the surcharge after three to five years.
The underwriting rules vary a lot by insurer, so it’s a good idea to work with an agent who deals with many companies. A good agent will get the basic information from you, then ask the insurer whether it’s worthwhile to apply. Keep in mind that being rejected by one insurer does not make it more difficult to qualify for coverage with another.
My thanks to Elizabeth Ody for her help this month.
Got a question? E-mail me at email@example.com