Interest Rates on Federal Student Loans Decrease to Record Lows for 2020-2021

For the second year in a row, interest rates on federal student loans will decrease for the 2020-2021 academic year. This year’s decrease brings rates to record lows. The rates apply to new federal student loans made on or after July 1, 2020, through June 30, 2021. The interest rate is fixed for the life of the loan.

New rate 2020-2021 Old rate 2019-2020 Available to Borrowing limits

Direct Loans: Undergraduates




Undergraduate students only

Subsidized loans are based on financial need as determined by the federal aid application (FAFSA)

For dependent undergraduates:

1st year: $5,500 (max $3,500 subsidized)

2nd year: $6,500 (max $4,500 subsidized)

3rd, 4th, 5th year: $7,500 (max $5,500 subsidized)

Max: $31,000 (max $23,000 subsidized)

Direct Loans: Undergraduates




Undergraduate students only; all students are eligible regardless of financial need

For dependent undergraduates:

1st year: $5,500 (max $3,500 subsidized)

2nd year: $6,500 (max $4,500 subsidized)

3rd, 4th, 5th year: $7,500 (max $5,500 subsidized)

Max: $31,000 (max $23,000 subsidized)

Direct Loans: Graduate or Professional Students



Graduate or professional students only; all students are eligible regardless of financial need

Unsubsidized loans only

$20,500 per year; max $138,500

Direct PLUS Loans:

Parents and Graduate Students



Parents of dependent undergraduate students and graduate or professional students

Unsubsidized loans only

Total cost of education, minus any other aid received by student or parent

Subsidized vs. unsubsidized

What’s the difference? With subsidized loans, the federal government pays the interest that accrues while the student is in school, during the six-month grace period after graduation, and during any loan deferment periods. With unsubsidized loans, the borrower is responsible for paying the interest during these periods. Only undergraduate students are eligible for subsidized loans, and eligibility is based on demonstrated financial need.

Small Businesses Eligible for Numerous Relief Programs During COVID-19 Crisis

Throughout March 2020, as it became increasingly evident that the economic impact from the COVID-19 pandemic would be both profound and prolonged, Congress passed several pieces of legislation with provisions to help small businesses shore up their coffers and keep employees on the payroll. Within a few weeks, initial funding for the two cornerstone programs,  the Paycheck Protection Program and the Economic Injury Disaster Loan program, ran dry. Many of the nation’s small businesses discovered they were shut out after submitting applications. On April 24, the president signed additional legislation, the Paycheck Protection Program, and Health Care Enhancement Act, to increase the amount of aid available to small businesses during the crisis.  However, industry insiders expect the funding to be depleted quickly once again.

Regardless of the status of these programs, business owners should familiarize themselves with all available aid to help ensure they are taking maximum advantage of the new laws, as well as other potential resources.

Programs administered by the Small Business Administration (SBA)

Paycheck Protection Program (PPP)

Details: As part of the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act signed on March 27, 2020, the PPP was originally funded by a $350 billion allocation. It is a first-come, first-served, forgivable loan program designed to encourage employers to keep paying all their employees, even if the businesses have been forced to shutter due to the virus. In order to take advantage of the program, small-business owners must submit an application to a participating lender, which then works with the Small Business Administration to guarantee the loan.

Loans can be for up to 2.5 times an employer’s average monthly payroll for the last year (up to an annualized maximum of $100,000 for each employee, $10 million in total) and may be used for expenses incurred between February 15, 2020, and June 30, 2020.

Note: Seasonal or new businesses will use different time periods to calculate the loan amount.

Loans may be forgiven as long as the employer uses the proceeds for payroll, rent, mortgage interest, and utilities over an eight-week period from the date of loan issuance. At least 75% of the forgiven amount must be used for payroll. Forgiveness is based on the employer maintaining or rehiring employees by June 30, 2020, and restoring salary levels. The amount forgiven will be reduced if full-time headcount declines or if wages decrease more than 25%.

Amounts not forgiven will have to be paid back over a two-year period at a 1% interest rate. Loan payments will be deferred for six months, and no collateral or personal guarantees are required. Moreover, no fees may be charged, either by the federal government or the lender.

Eligible employers: Businesses that may apply include those with 500 or fewer employees (or, if more than 500, those meeting the SBA’s industry size standard); accommodations and food services businesses that have multiple locations employing no more than 500 employees per location; certain nonprofits and veterans organizations; sole proprietors, independent contractors, and the self-employed.

Status: On April 16, 2020, after guaranteeing 1.6 million loans under the PPP, the SBA stopped accepting applications when the funding was exhausted. Subsequently, many small businesses complained that they were shut out of the program, while large restaurant corporations were able to secure tens of millions of dollars in loans. On April 23, the Treasury Department updated its FAQ guidance to address this issue, saying, “It is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith” that the loan is necessary to support the company’s ongoing operations. As such, many large corporations have been returning their loan proceeds, and the Treasury Department has said that any such company that repays its loan by May 7 will be treated as if it had acted in good faith. On the same day, Congress passed the Paycheck Protection Program and Health Care Enhancement Act, allocating an additional $310 billion toward the fund, $60 billion of which will be designated for small, midsize, and community leaders. During an online panel discussion on April 24, Neil Bradley, executive vice president, and chief policy officer of the U.S. Chamber of Commerce, recommended that small businesses that had previously applied for a loan but had not yet received approval should reach out to their lenders to ask about the status. He noted that funds are expected to run out quickly and that further guidance is expected from the Treasury Department on various aspects of the loan program.

Economic Injury Disaster Loan (EIDL) program

Details: As part of the Coronavirus Preparedness and Response Supplemental Appropriations Act signed on March 6, 2020, Congress set aside additional funding for small-business disaster assistance. The EIDL program offers low-interest federal disaster loans to small businesses throughout the United States that suffer a substantial economic injury due to COVID-19. Loans of up to $2 million can be used for many different types of expenses, including payroll, accounts payable, fixed debts, real estate payments, and other bills. Interest rates are 3.75% for small businesses with no other available credit and 2.75% for nonprofits. Payment can be spread over long time periods, as much as 30 years. The program is scheduled to last through December 31, 2020.

Subsequently, a provision in the CARES Act allowed for EIDL loan advances of up to $10,000 to small businesses facing a temporary loss of revenue. The loan advance does not have to be repaid (i.e., it is essentially a grant) and is intended to provide a much-needed influx of cash more quickly than the EIDL loans. These grants can be used to meet certain immediate expenses, including rent or mortgage, and paid sick leave to employees affected by COVID-19.

Eligible employers: Businesses that may apply are those with fewer than 500 employees, including sole proprietors, independent contractors, and self-employed individuals affected by COVID-19. Businesses with more than 500 employees may be eligible if they meet the SBA’s industry size standards.

Status: This program was also put on hold earlier in April after initial funding was exhausted. Due to the Paycheck Protection Program and Health Care Enhancement Act, the program will receive an additional $60 billion. Farmers and ranchers with 500 or fewer employees are now eligible for the EIDL program. As of this writing, the SBA website says, “SBA will resume processing EIDL loan and advance applications that are already in a queue on a first-come, first-served basis. We will provide further information on the availability of the EIDL portal to receive new applications (including those from agricultural enterprises) as soon as possible.”

SBA Express Bridge Loan program

These loans allow small businesses that currently have a relationship with an SBA Express lender to quickly access up to $25,000 to help replace a loss of revenue. They can be either term loans or used to bridge the gap while business owners await disbursement on an EIDL. The loans will be paid in full or in part by proceeds from the EIDL loan.

SBA Debt Relief program

The SBA will automatically pay the principal, interest, and fees of 7(a), 504, and microloans for six months for both current loans and new loans issued before September 27, 2020. The program also provides assistance to businesses that held an SBA-serviced disaster (home and business) loan that was in regular servicing status on March 1, 2020. The SBA is providing automatic deferments through December 31, 2020.

Note: Interest on the disaster loans will continue to accrue during the deferment period. Borrowers who have set up an automatic payment program will need to cancel those payments if they choose to take advantage of the deferment program and will need to reestablish the automatic payments.

Employee leave and associated employer tax credits

The Family First Coronavirus Response Act (FFCRA) signed on March 18, 2020, ushered in provisions designed to protect employees affected by COVID-19, while providing relief to their employers.

Family and medical leave

The Family and Medical Leave Act (FMLA) was expanded to cover employees who are unable to work due to a need to care for a child whose school or daycare is closed, or whose provider is unavailable due to a “public health emergency.” Employees will receive at least two-thirds of their regular pay, up to $200 per day and $10,000 over the benefit period. The first 10 days may be taken unpaid, but the employee may use other available paid leave during that time frame.

Up to 10 weeks of leave may be taken toward the family leave credit. The provision is in effect from April 1, 2020, through December 31, 2020, and applies to employees covered by Title I of the FMLA. Applicable employers include private businesses with fewer than 500 employees and all public employers.

Note: Employers with fewer than 50 employees may be exempt if compliance would jeopardize the viability of the business. Health-care and first-responder employees may be excluded.

Emergency paid sick leave

This provision covers qualified employees who are unable to work (or telework) because they are subject to a quarantine or isolation order, have been advised by a health-care provider to self-quarantine due to coronavirus concerns, or are experiencing symptoms of coronavirus and are seeking a medical diagnosis. Employees will receive up to two weeks (80 hours) of their regular pay (or, if higher, the federal, state, or local minimum wage), up to $511 per day for a maximum of $5,110 over the benefit period.

An employee who is caring for someone with coronavirus, or caring for a child because the child’s school or daycare is closed or whose child-care provider is unavailable, may receive up to two weeks (80 hours) of sick leave at two-thirds of the employee’s regular pay (or the federal, state, or local minimum wage, if higher), up to $200 per day for a maximum of $2,000.

The provision covers the same period as the expanded FMLA (April 1, 2020, to December 31, 2020) and applies to the same employers.

Note: Employers may exclude certain health-care workers and first responders. Small businesses with fewer than 50 employees are exempt from the requirement to provide paid sick leave to employees who are caring for their child due to the applicable reasons if compliance would jeopardize the viability of the business.

Associated tax credits

Eligible employers can receive a tax credit for the full amount of coronavirus-related sick and family leave, plus related health plan expenses and the employer’s share of Medicare tax on the leave for the covered period. The refundable credit is applied against certain employment taxes on wages paid to all employees.

Self-employed individuals may be eligible for qualified sick leave equivalent tax credits (also for a maximum of 10 days):

  • Lesser of $511 or 100% of average daily self-employment income due to COVID-19 symptoms or a local quarantine/isolation order
  • Lesser of $200 per day or 67% of average daily self-employment income if caring for someone with coronavirus or caring for a child due to a coronavirus-related reason (including child’s school closure)

Employee Retention Tax Credit

Employers whose operations have been partially or fully suspended due to mandated shutdowns, or whose gross receipts have experienced a significant decline year-over-year compared to 2019, are eligible for an employee retention credit equal to $5,000 per employee (50% of up to $10,000 in qualified wages, including health plan expenses) paid after March 12, 2020, and before January 1, 2021.

The credit applies against certain employment taxes on wages paid to all employees. Employers may reduce federal employment tax deposits in anticipation of this credit and may request an advance for any amounts not covered by this reduction.

Note: According to the U.S. Chamber of Commerce, businesses cannot take associated tax credits and receive a PPP loan.

Employer Payroll Tax Deferral

A CARES Act provision allows employers to defer the employer’s share of Social Security taxes and self-employed individuals to defer payment of certain self-employment taxes. Deferrals may occur between March 27, 2020, and December 31, 2020.

Note: Businesses may not defer the deposit and payment of these taxes after the employer receives loan forgiveness under the PPP.

State, regional, and local assistance

In addition to the numerous federal initiatives, many states and localities are implementing their own programs. Small businesses in need of support should reach out to these agencies to research opportunities that may be available. The U.S. Chamber of Commerce has an online resource designed to help small-business owners investigate state programs.

Additional resources

For information on the Paycheck Protection Program, review the U.S. Treasury Department Information Sheet. For more information on other SBA-backed programs, visit the Small Business Administration. For more information on coronavirus-related employer tax credits, visit the IRS.

Finally, the U.S. Chamber of Commerce has launched the Save Small Business Initiative, a nationwide program to provide supplemental funding, resources and webinars, research, and advocacy to support small businesses affected by the COVID-19 crisis. For more information, visit the Save Small Business Initiative website.

Sources: U.S. Department of the Treasury; Small Business Administration; Kaiser Family Foundation; National Federation of Independent Businesses; Inc. magazine; U.S. Chamber of Commerce; and The Wall Street Journal

Due Date for Federal Income Tax Returns and Payments Postponed to July 15

Due to the coronavirus pandemic, the due date for filing federal income tax returns and making tax payments has been postponed by the IRS from Wednesday, April 15, 2020, to Wednesday, July 15, 2020. No interest, penalties, or additions to tax will be incurred by taxpayers during this 90-day relief period for any return or payment postponed under this relief provision.

The relief applies automatically to all taxpayers, and they do not need to file any additional forms to qualify for the relief. The relief applies to federal income tax payments (for the taxable year 2019) and estimated tax payments (for the taxable year 2020) due on April 15, 2020, including payments of tax on self-employment income. There is no limit on the amount of tax that can be deferred.

Note: Under this relief provision, no extension is provided for the payment or deposit of any other type of federal tax, or for the filing of any federal information return.

Need more time?

If you’re not able to file your federal income tax return by the July due date, you can file for an extension by the July due date using IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. Filing this extension gives you an additional three months (until October 15, 2020) to file your federal income tax return. You can also file for an automatic three-month extension electronically (details on how to do so can be found in the Form 4868 instructions). There may be penalties for failing to file or for filing late.

Filing for an extension using Form 4868 does not provide any additional time to pay your tax. When you file for an extension, you have to estimate the amount of tax you will owe and pay this amount by the July filing due date. If you don’t pay the amount you’ve estimated, you may owe interest and penalties. In fact, if the IRS believes that your estimate was not reasonable, it may void your extension.

Tax refunds

The IRS encourages taxpayers to seek a tax refund to file their tax returns as soon as possible. Apparently, most tax refunds are still being issued within 21 days of the IRS receiving a tax return.

The SECURE Act and Your Retirement Savings

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was enacted in December 2019 as part of a larger federal spending package. This long-awaited legislation expands savings opportunities for workers and includes new requirements and incentives for employers that provide retirement benefits. At the same time, it restricts a popular estate planning strategy for individuals with significant assets in IRAs and employer-sponsored retirement plans.

Here are some of the changes that may affect your retirement, tax, and estate planning strategies. All of these provisions were effective January 1, 2020, unless otherwise noted.

Benefits for retirement savers

Later RMDs. Individuals born on or after July 1, 1949, can wait until age 72 to take required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans instead of starting them at age 70½ as required under previous law. This is a boon for individuals who don’t need the withdrawals for living expenses because it postpones the payment of income taxes and gives the account a long time to pursue tax-deferred growth. As under previous law, participants may be able to delay taking withdrawals from their current employer’s plan as long as they are still working.

No traditional IRA age limit. There is no longer a prohibition on contributing to a traditional IRA after age 70½ — taxpayers can make contributions at any age as long as they have earned income. This helps older workers who want to save while reducing their taxable income. But keep in mind that contributions to a traditional IRA only defer taxes. Withdrawals, including any earnings, are taxed as ordinary income, and a larger account balance will increase the RMDs that must start at age 72.

Tax breaks for special situations. For the 2019 and 2020 tax years, taxpayers may deduct unreimbursed medical expenses that exceed 7.5% of their adjusted gross income. In addition, withdrawals may be taken from tax-deferred accounts to cover medical expenses that exceed this threshold without owing the 10% penalty that normally applies before age 59½. (The threshold returns to 10% in 2021.) Penalty-free early withdrawals of up to $5,000 are also allowed to pay for expenses related to the birth or adoption of a child. Regular income taxes apply in both situations.

Tweaks to promote saving. To help workers track their retirement savings progress, employers must provide participants in defined contribution plans with annual statements that illustrate the value of their current retirement plan assets, expressed as monthly income received over a lifetime. Some plans with auto-enrollment may now automatically increase participant contributions until they reach 15% of salary, although employees can opt-out. (The previous ceiling was 10%.)

More part-timers gain access to retirement plans. For plan years beginning on or after January 1, 2021, part-time workers age 21 and older who log at least 500 hours annually for three consecutive years generally must be allowed to contribute to qualified retirement plans. (The previous requirement was 1,000 hours and one year of service.) However, employers will not be required to make matching or nonelective contributions on their behalf.

Benefits for small businesses

In 2019, only about half of people who worked for small businesses with fewer than 50 employees had access to retirement benefits.1 The SECURE Act includes provisions intended to make it easier and more affordable for small businesses to provide qualified retirement plans.

The tax credit that small businesses can take for starting a new retirement plan has increased. The new rule allows a credit equal to the greater of (1) $500 or (2) $250 times the number of non-highly compensated eligible employees or $5,000, whichever is less. The previous credit amount allowed was 50% of startup costs up to $1,000 ($500 maximum credit). There is also a new tax credit of up to $500 for employers that launch a SIMPLE IRA or 401(k) plan with automatic enrollment. Both credits are available for three years.

Effective January 1, 2021, employers will be permitted to join multiple employer plans (MEPs) regardless of industry, geographic location, or affiliation. “Open MEPs,” as they have become known, enable small employers to band together to provide a retirement plan with access to lower prices and other benefits typically reserved for large organizations. (Previously, groups of small businesses had to be related somehow in order to join a MEP.) The legislation also eliminates the “one bad apple” rule, so the failure of one employer in an MEP to meet plan requirements will no longer cause others to be disqualified.

Goodbye stretch IRA

Under previous law, non-spouse beneficiaries who inherited assets in employer plans and IRAs could “stretch” RMDs — and the tax obligations associated with them — over their lifetimes. The new law generally requires a beneficiary who is more than 10 years younger than the original account owner to liquidate the inherited account within 10 years. Exceptions include a spouse, a disabled or chronically ill individual, and a minor child. The 10-year “clock” will begin when a child reaches the age of majority (18 in most states).

This shorter distribution period could result in bigger tax bills for children and grandchildren who inherit accounts. The 10-year liquidation rule also applies to IRA trust beneficiaries, which may conflict with the reasons a trust was originally created.

In addition to revisiting beneficiary designations, you might consider how IRA dollars fit into your overall estate plan. For example, it might make sense to convert traditional IRA funds to a Roth IRA, which can be inherited tax-free (if the five-year holding period has been met). Roth IRA conversions are taxable events, but if converted amounts are spread over the next several tax years, you may benefit from lower income tax rates, which are set to expire in 2026.

If you have questions about how the SECURE Act may impact your finances, this may be a good time to consult your financial, tax, and/or legal professionals.

1) U.S. Bureau of Labor Statistics, 2019

Year-End Charitable Giving

With the holiday season upon us and the end of the year approaching, we pause to give thanks for our blessings and the people in our lives. It is also a time when charitable giving often comes to mind. The tax benefits associated with charitable giving could potentially enhance your ability to give and should be considered as part of your year-end tax planning.

Tax deduction for charitable gifts

If you itemize deductions on your federal income tax return, you can generally deduct your gifts to qualified charities. This may also help you potentially increase your gift.

Example(s): Assume you are considering making a charitable gift of $1,000. One way to potentially enhance the  gift might be if you increase it by the amount of any income taxes you save with the charitable deduction for the gift. With a 24% tax rate, you might be able to give $1,316 to charity [$1,000 ÷ (1 – 24%) = $1,316; $1,316 x 24% = $316 taxes saved]. On the other hand, with a 32% tax rate, you might be able to give $1,471 to charity [$1,000 ÷ (1 – 32%) = $1,471; $1,471 x 32% = $471 taxes saved].

However, keep in mind that the amount of your deduction may be limited to certain percentages of your adjusted gross income (AGI). For example, your deduction for gifts of cash to public charities is generally limited to 60% of your AGI for the year, and other gifts to charity are typically limited to 30% or 20% of your AGI. Charitable deductions that exceed the AGI limits may generally be carried over and deducted over the next five years, subject to the income percentage limits in those years.

Make sure you retain proper substantiation of your charitable contribution. In order to claim a charitable deduction for any contribution of cash, a check, or other monetary gifts, you must maintain a record of such contributions through a bank record (such as a canceled check, a bank or credit union statement, or a credit card statement) or written communication (such as a receipt or letter) from the charity showing the name of the charity, the date of the contribution, and the amount of the contribution. If you claim a charitable deduction for any contribution of $250 or more, you must substantiate the contribution with a contemporaneous written acknowledgment of the contribution from the charity. If you make any noncash contributions, there are additional requirements.

Year-end tax planning

When making charitable gifts at the end of a year, you should consider them as part of your year-end tax planning. Typically, you have a certain amount of control over the timing of income and expenses. You generally want to time your recognition of income so that it will be taxed at the lowest rate possible, and the time your deductible expenses so they can be claimed in years when you are in a higher tax bracket.

For example, if you expect that you will be in a higher tax bracket next year, it may make sense to wait and make the charitable contribution in January so that you can take the deduction next year when the deduction results in a greater tax benefit. Or you might shift the charitable contribution, along with other deductions, into a year when your itemized deductions would be greater than the standard deduction amount. And if the income percentage limits above are a concern in one year, you might consider ways to shift income into that year or shift deductions out of that year, so that a larger charitable deduction is available for that year. A tax professional can help you evaluate your individual tax situation.

A word of caution

Be sure to deal with recognized charities and be wary of charities with similar-sounding names. It is common for scam artists to impersonate charities using bogus websites and through contact involving email, phone calls, social media, and in-person solicitations. Check out the charity on the IRS website,, using the Tax Exempt Organization Search tool. And don’t send cash; contribute by check or credit card.

IRA and Retirement Plan Limits for 2020

As we move into 2020, let’s take a moment to consider the updated thresholds for retirement plan funding.

IRA contribution limits

The maximum amount you can contribute to a traditional IRA     or a Roth IRA in 2020 is $6,000 (or 100% of your earned income, if less), unchanged from 2019. The maximum catch-up contribution for those age     50 or older remains at $1,000. You can contribute to both a traditional IRA and a Roth IRA in 2020, but your total contributions can’t exceed these annual limits.

Traditional IRA income limits

If you are not covered by an employer retirement plan, your contributions to a traditional IRA are generally fully tax-deductible. For those who are covered by an employer plan, the income limits for determining the deductibility of traditional IRA contributions in 2020 have increased. If your filing status is single or head of household, you can fully deduct your IRA contribution up to $6,000 ($7,000 if you are age 50 or older) in     2020 if your modified adjusted gross income (MAGI) is $65,000 or less (up from $64,000 in 2019). If you’re married and filing a joint return, you can fully deduct up to $6,000 ($7,000 if you are age 50 or older) in 2020 if your     MAGI is $104,000 or less (up from $103,000 in 2019).

If your 2020 federal income tax      filing status is: Your  IRA deduction is limited if your MAGI is      between: Your deduction is eliminated if your MAGI is:
Single or head of household $65,000 and $75,000 $75,000 or more
Married filing jointly or qualifying      widow(er) $104,000 and $124,000 (combined) $124,000 or more      (combined)
Married filing separately $0      and $10,000 $10,000 or more

If you’re not covered by an employer plan but your spouse is, and you file a joint return, your deduction is limited if your MAGI is $196,000 to $206,000 (up from $193,000 to $203,000 in 2019), and eliminated if your MAGI exceeds $206,000 (up from $203,000 in 2019).

Roth IRA income limits

The income limits for determining how much you can contribute to a Roth IRA have also increased for 2020. If your filing status is single or head of household, you can contribute the full $6,000  ($7,000 if you are age 50 or older) to a Roth IRA if your MAGI is $124,000 or less (up from $122,000 in 2019). And if you’re married and filing a joint return, you can make a full contribution if your     MAGI is $196,000 or less (up from $193,000 in 2019). (Again, contributions     can’t exceed 100% of your earned income.)

If your 2020 federal income tax      filing status is: Your Roth IRA contribution is limited if your MAGI      is: You cannot contribute to a Roth IRA if your MAGI is:
Single or head of household More than $124,000 but under $139,000 $139,000 or more
Married filing jointly or qualifying      widow(er) More than $196,000 but under $206,000      (combined) $206,000 or more (combined)
Married filing separately More      than $0 but under $10,000 $10,000 or more

Employer retirement plans

Most of the significant employer retirement plan limits for 2020 have also increased. The maximum amount you can contribute (your “elective     deferrals”) to a 401(k) plan is $19,500 in 2020 (up from $19,000 in 2019). This limit also applies to 403(b) and 457(b) plans, as well as the Federal Thrift     Plan. If you’re age 50 or older,     you can also make catch-up contributions of up to $6,500 to these plans in 2020 (up from $6,000 in 2019). (Special catch-up limits apply to certain participants     in 403(b) and 457(b) plans.)

If you participate in more than one retirement plan, your total elective deferrals can’t exceed the annual limit ($19,500 in 2020 plus any applicable catch-up contributions). Deferrals to 401(k) plans, 403(b) plans,     and SIMPLE plans are included in this aggregate limit, but deferrals to Section     457(b) plans are not. For example, if you participate in both a 403(b) plan and a 457(b) plan, you can defer the full dollar limit to each plan — a total of     $39,000 in 2020 (plus any catch-up contributions).

The amount you can contribute to a SIMPLE IRA or SIMPLE     401(k) is $13,500 in 2020 (up from $13,000 in 2019), and the catch-up limit for those age 50 or older remains at $3,000.

Plan type: Annual dollar      limit: Catch-up limit:
401(k), 403(b), governmental 457(b),      Federal Thrift Plan $19,500 $6,500
SIMPLE      plans $13,500 $3,000

Note: Contributions can’t exceed 100% of your income.

The maximum amount that can be allocated to your account in a defined contribution plan (for example, a 401(k) plan or profit-sharing plan)     in 2020 is $57,000 (up from $56,000 in 2019) plus age 50 catch-up contributions. (This includes both your contributions and your employer’s contributions. Special rules apply if your employer sponsors more than one     retirement plan.)

Finally, the maximum amount of compensation that can be taken into account in determining benefits for most plans in 2020 is     $285,000 (up from $280,000 in 2019), and the dollar threshold for determining highly compensated employees (when 2020 is the look-back year) is     $130,000 (up from $125,000 when 2019 is the look-back year).

Could a Health Savings Account Help Strengthen Your Retirement Plan?

By one estimate, a 65-year-old couple who retired in 2019 may need about $300,000 in savings to pay their health-care expenses in retirement. This includes premiums for Medicare Parts B and D, supplemental (Medigap) insurance, and median out-of-pocket prescription drug expenses, but not other health expenses such as long-term care, dental care, and eye care.1

Health expenses are rising faster than inflation, and even insured workers are finding it harder to pay their portion from year to year (premiums, copays, coinsurance, and deductibles), much less plan for the future. The stakes are even higher for early retirees (younger than 65) and self-employed individuals who must purchase their own health insurance and bear the entire cost themselves.

A health savings account (HSA) is a tax-advantaged account linked with a high-deductible health plan (HDHP). They work together to help you cover your current health-care costs and also save for your future needs.

Tax trifecta

HSAs offer several tax benefits to help encourage diligent saving.

  1. Pre-tax contributions can often be made through an employer via payroll deduction, or you can make contributions yourself and take a tax deduction whether you itemize or not. Either way, HSA contributions reduce your adjusted gross income and federal income tax for the current year.
  2. Any interest or investment earnings compound on a tax-deferred basis inside the HSA.
  3. Withdrawals are tax-free if the money is spent on qualified medical expenses. When HSA money is spent on anything other than qualified medical expenses, withdrawals are taxed as ordinary income, and an onerous 20% penalty applies to taxpayers under age 65.

Depending on your state, HSA contributions and earnings may or may not be subject to state taxes.

Contribution rules

The maximum HSA contribution limit in 2020 is $3,550 for individual coverage or $7,100 for family coverage. This annual limit applies to all contributions, including those made by you, your family members, or your employer. You can contribute an additional $1,000 starting the year you turn 55. Once you sign up for Medicare, you can no longer contribute to an HSA.

Funds roll over from year to year and are portable, which means they are yours to keep. When HSA balances reach a certain threshold, you can steer the funds into a paired account with investment options similar to those offered in a 401(k). You can make 2019 contributions up to April 15, 2020.

Pros and cons

HDHPs are designed to help control health costs. HSA owners are forced to pay attention to prices, so they may select lower-cost providers and be more likely to avoid unnecessary spending. On the other hand, some people with HDHPs might be reluctant to seek care when they need it because they don’t want to spend the money in their account. A high deductible can make it difficult to pay for a costly medical procedure, especially if there hasn’t been much time to build up an HSA balance.

To be eligible to establish or contribute to an HSA, you must be enrolled in a qualifying high-deductible health plan — an HDHP with a deductible of at least $1,400 for individuals, $2,800 for families in 2020. Workers who are offered HDHPs (as a choice or their only option) or purchase their own insurance often face much higher deductibles. In 2019, the average deductible for employer-provided HDHPs was $2,486 for individual coverage and $4,779 for family coverage.2

Qualifying HDHPs also have out-of-pocket maximums, above which the insurer pays all costs. In 2020, the upper limit is $6,900 for individual coverage or $13,800 for family coverage, but plans may have lower caps. This feature could help you budget accordingly for a worst-case scenario.

Premiums are typically lower for HDHPs than traditional health plans. Until the deductible is satisfied, members usually pay more up-front for services such as physician visits, surgery, and prescriptions, but typically receive the insurer’s negotiated discounts.

Some preventive care, such as routine physicals and cancer screenings, may be covered without being subject to the deductible. Under new IRS guidance issued in July 2019, the list of preventive care benefits that HDHPs may provide was expanded to include certain medications and treatments for chronic illnesses such as asthma, diabetes, depression, heart disease, and kidney disease. Providing this coverage encourages patients to seek care before problems become more serious and costly.

Retirement strategy

Another HSA benefit is that account funds not needed for health expenses are available for any other purpose after you reach age 65. Although HSA funds cannot be used to pay regular health plan premiums, they can be used for Medicare premiums and qualified long-term care insurance premiums and services that you may need later in life.

If you can afford to fund your HSA generously while working, some of those dollars could be left untouched to accumulate for many years. You could even pay current medical expenses out of pocket and preserve your HSA assets for use during retirement. But save your receipts in case you have an unexpected cash crunch. You can reimburse yourself for eligible expenses at any time.

Compare carefully

Open enrollment is the time of year when employers typically introduce changes to their benefit offerings. If you purchase your own health insurance, you might also be presented with new options for 2020. The bottom line is that choosing and using your health plan carefully could help you save money. If you choose an HDHP, make sure to contribute the premium dollars you are saving to your HSA, and more if you can.

Before you sign up for a specific plan, read the policy information and look closely for any coverage gaps or policy exclusions, consider the extent to which your prescription drugs are covered, estimate your potential out-of-pocket costs based on last year’s usage, and check to see whether your doctors are in the insurer’s network.

1) Employee Benefit Research Institute, 2019

2) Kaiser Family Foundation, 2019

Data Breaches: Tips for Protecting Your Identity and Your Money

 Large-scale data breaches are in the news again, but that’s hardly surprising. Breaches have become more frequent — a byproduct of living in an increasingly digital world. During the first six months of 2019, the Identity Theft Resource Center (ITRC), a nonprofit organization whose mission includes broadening public awareness of data breaches and identity theft, had already tracked 713 data breaches, with more than 39 million records exposed.1  Once a breach has occurred, the “aftershocks” can last for years as cyber thieves exploit stolen information. Here are some ways to help protect yourself.

Get the facts

Most states have enacted legislation requiring notification of data breaches involving personal information. However, requirements vary. If you are notified that your personal information has been compromised as the result of a data breach, read through the notification carefully. Make sure you understand what information was exposed or stolen. Basic information like your name or address being exposed is troubling enough, but extremely sensitive data such as financial account numbers and Social Security numbers are significantly more concerning. Also, understand what the company is doing to deal with the issue and how you can take advantage of any assistance being offered (for example, free credit monitoring).

Even if you don’t receive a notification that your data has been compromised, take precautions.

Be vigilant

Although you can’t stop wide-scale data breaches, you can take steps to protect yourself. If there’s even a chance that some of your personal information may have been exposed, make these precautions a priority.

  • Change and strengthen passwords. Create strong passwords, at least 8 characters long, using a combination of lower- and upper-case letters, numbers, and symbols, and don’t use the same password for multiple accounts.
  • Consider using two-step authentication when available. Two-step authentication, which may involve using a text or email code in addition to your password, provides an extra layer of protection.
  • Monitor your accounts. Notify your financial institution immediately if you see any suspicious activity. Early notification not only can stop a potential thief but may help limit any financial liability.
  • Check your credit reports periodically. You’re entitled to a free copy of your credit report from each of the three national credit reporting agencies every 12 months. You can get the additional information and request your credit reports at
  • Consider signing up for a credit monitoring service. It’s not uncommon for a company that has suffered a data breach to provide free access to a credit monitoring service. As the name implies, this service tracks your credit files and alerts you to changes in activity, such as new accounts being opened or an address change.
  • Minimize information sharing. Beware of any requests for information, whether received in an email, a letter, or a phone call. Criminals may try to leverage stolen information to trick you into providing even more valuable data. Never provide your Social Security number without being absolutely certain who you are dealing with and why the information is needed.

Fraud alerts and credit freezes

If you suspect that you’re a victim of identity theft or fraud, consider a fraud alert or credit freeze.

A fraud alert requires creditors to take extra steps to verify your identity before extending any existing credit or issuing new credit in your name. To request a fraud alert, you have to contact one of the three major credit reporting bureaus. Once you have placed a fraud alert on your credit report with one of the bureaus, your fraud alert request will be passed along to the two remaining bureaus.

A credit freeze prevents new credit and accounts from being opened in your name. Once you obtain a credit freeze, creditors won’t be allowed to access your credit report and therefore cannot offer new credit. This helps prevent identity thieves from applying for credit or opening fraudulent accounts in your name.

To place a credit freeze on your credit report, you must contact each credit reporting bureau separately. Keep in mind that a credit freeze is permanent and stays on your credit report until you unfreeze it. If you want to apply for credit with a new financial institution in the future, open a new bank account, apply for a job, or rent an apartment, you’ll need to “unlock” or “thaw” the credit freeze with all three credit reporting bureaus. Each credit bureau has its own authentication process for unlocking the freeze.

Recovery plans

The Federal Trade Commission has an online tool that enables you to report identity theft and to actually generate a personal recovery plan. Once your personal recovery plan is prepared, you’ll be able to implement the plan using forms and letters that are created just for you. You’ll also be able to track your progress. For more information, visit

1 Identity Theft Resource Center, Data Breach Reports, June 30, 2019

Profit Sharing and Your Small Business

Business owners who want to sponsor a retirement plan for employees (including owner-employees) have many options from which to choose. Knowing the basics can help entrepreneurs make the best decision.
One choice is a “profit-sharing” plan. Despite its name, your company doesn’t need to tabulate its earnings every year and divide that amount among its workers. Instead, the term indicates a plan in which contributions to employees’ retirement accounts are made by the employer. Therefore, a profit-sharing plan may help your company to attract, motivate, and retain valued employees. These plans are flexible, so employers can contribute more in good years and less (or nothing at all) when business is slow.

Considerable contributions

Profit-sharing plans may permit employers to make relatively large, tax-deductible contributions to employees’ retirement funds. Employees won’t owe income tax until the money is withdrawn; in the interim, any investment earnings can compound, untaxed.
In 2017, employer contributions can be up to 100% of compensation, with a ceiling of $54,000. Of those contributions, the company can deduct amounts up to 25% of total compensation for all participants.
A traditional profit-sharing plan usually calls for pro rata contributions to all covered employees’ accounts.
Example 1: PSP Corp. makes a $6,000 contribution to an account for Al, who earns $30,000 (20% of pay), $10,000 to Barb, who earns $50,000, $20,000 for Chet, who earns $100,000, and $50,000 for Doris, the company owner who earns $250,000.
Profit-sharing plans must have a set formula for determining how the contributions are allocated among plan participants, but they needn’t be traditional pro rata plans, as illustrated in example 1. Instead, profit-sharing plans may be structured to put a greater percentage of compensation in the accounts of certain employees. Such a plan might result in a contribution of around $8,000 or even $2,500 to the account for Barb, earning $50,000, while Doris, earning $250,000, still gets $50,000 contributed to her account. These sophisticated profit-sharing plans must be constructed with care, to comply with federal rules; our office can help if you’re interested in this type of arrangement.

Nuts and bolts

Participation in a profit-sharing plan typically must be offered to all employees age 21 or older who worked at least 1,000 hours in a previous year. Employer contributions may vest over time, according to a plan’s specific terms. Annual filing of IRS Form 5500 is required. Withdrawals generally will be permitted at retirement, plan termination, and perhaps at other times, such as after age 59½. Distributions will be taxed. A profit-sharing plan may permit loans and hardship withdrawals, but withdrawals before age 59½ may trigger income tax plus an additional tax of 10%.

The “Other” Exchange Traded Fund

Exchange-traded funds (ETFs) have become popular in this century, due largely to relatively low expenses and tax efficiency. As the name indicates, ETFs trade like stocks, on an exchange, as opposed to mutual funds, which typically are bought from and sold to the sponsoring company. Often, ETFs track a particular market index.
Less publicized these days are what might be considered the original exchange-traded funds, known as closed-end funds. Closed-end funds also issue a certain number of shares, which trade between investors on a stock exchange. Rather than mimic an index, closed-end funds usually are actively managed, in an effort to deliver superior returns to investors.

The case for closed-ends

Should investors put money into closed-end funds? Perhaps. Some closed-end funds have excellent long-term records, including some that specialize in a certain area, such as a single foreign country’s stocks.
In addition, specific features of these funds might appeal to investors. For instance, closed-end funds frequently trade at a premium or a discount to net asset value (NAV).
Example 1: CEF closed-end fund holds stocks of various companies; the current market value of those shares is $100 million. Ten million shares of CEF are outstanding. Thus, the NAV of CEF is $10 per share ($100 million divided by 10 million).
Nevertheless, CEF now trades at $9.25 a share: a 7.5% discount to its NAV. Over the past year, CEF has sometimes traded at a larger discount, sometimes at a smaller discount, and sometimes even at a premium to its current NAV.
Among the universe of closed-end funds, it’s typical for investors to see a range of premiums and discounts, which can change at any time. Some investors will study a desirable closed-end fund for some time, observing its discount/premium range. When the fund is nearest its widest discount to NAV, there may be a buying opportunity, and a chance to profit if the discount narrows, beyond the normal profit potential of investing in securities. There’s also risk, if the discount should become even larger, in addition to the usual market risk that a share price might drop.

Using leverage

In addition, buying closed-end shares at a discount can raise the dividend yield to investors. If CEF holds companies with an average dividend yield of, say, 4%, and investors can buy at a 10% discount to NAV, the dividend yield would go up to 4.44%: an annualized 40 cents a share, on a $10 NAV, if CEF is purchased at $9 a share.
Some closed-end funds go even further to boost yields to investors. They use leverage to buy more shares, perhaps by borrowing money or issuing preferred shares or using other tactics. Closed-end bond funds may be likely to follow such a plan.
Example 2: LEV closed-end fund issues $100 million worth of common shares and leverages the fund by issuing $50 million of preferred shares, paying 3% to investors. Then, LEV uses the total $150 million raised to buy municipal bonds with an average yield of 5%.
The $150 million of municipal bonds will pay $7.5 million a year in interest at 5%. LEV will pay $1.5 million to its preferred shareholders: 3% of $50 million. That will leave $6 million ($7.5 million minus $1.5 million) for investors in the common shares. The latter investors will get a 6% return on their $100 million outlay, even though LEV holds bonds yielding 5%. Leverage can benefit investors, but such practices also can add to losses in a down market, so investors should proceed with care.
Information about these funds is available from the Closed-End Fund Association at