Harry Sit's Blog, page 29

Ally Bank Removed Online Early Withdrawal From No-Penalty CDs

I have some money in a no-penalty CD at Ally Bank. A no-penalty CD offers the best of both worlds: The interest rate is guaranteed not to go down during the term, and the money stays liquid at all times. If you need money before the CD matures, there is no early withdrawal penalty.

It used to be very easy to break a CD at Ally Bank. You go through an online interface and choose to transfer the money to an Ally savings account or a linked external account. Now Ally Bank quietly removed the simple online process. They replaced it with this message:

We’re only processing early withdrawals by phone right now.
Call us at 1-877-247-2559. We’re here 24/7.

The message makes it sound like it’s only temporary, maybe during system maintenance, but it’s not. The change is permanent. The online process is gone. If you need to withdraw early from your CD, you must call customer service.

Calling sounds simple but it’s not. If you don’t remember your favorite movie or whatever answer you gave to the security question, you won’t pass authentication. If you gave your Google Voice number as your mobile phone number, which they happily supported when you set up your account back then but now they don’t, you won’t be able to receive any security code they text you. If you fail authentication when you call, they will lock your online account. Now you’ll have to wait for someone from the Loss Prevention department to contact you in two to five business days. If you need the money from your CD, which is why you were forced to call to begin with, they don’t care. No way to contact Loss Prevention. No way to expedite. Just wait until they find time to call you. Please don’t ask me how I know.

Before you call any financial institution, while you still have online access to your account, go through all the security setups and make sure you have all the information you gave them when you first set up your account a long time ago. Reconsider using any online-only bank that forces you to call to transact business.

An online bank not allowing routine transactions online isn’t acceptable to me. I will close my account with Ally when my CDs mature.

When rates are so low anyway, it favors banks and credit unions with a physical presence. At least you have an option to go in and talk to someone to resolve any issues, whereas you are helpless when an online bank cuts off your access. If you can’t find good rates from a local bank or credit union, consider Marcus. Marcus also offers no-penalty CDs. Rates on savings accounts and CDs at Marcus are competitive with the rates at Ally Bank.

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Relocate Out of California to Escape High Taxes After Retirement?

Whenever we mention to people that we moved from California, they all say it makes sense because we get to avoid the high state income tax in California. I don’t blame them. California has a reputation for high taxes. When you Google state income taxes, you get a map like this:

Source: State Individual Income Tax Rates and Brackets for 2020, Tax Foundation

California is shown in the darkest color. Its 13.3% top marginal tax rate is the highest in the country. On the other hand, even when we worked full-time in California, we never paid 13.3%. The 13.3% rate is only for people making over $1 million. Our marginal state income tax rate was 9.3%, which is still high, but it’s at least lower than the 9.9% rate in the neighbor state Oregon, or the 9.85% rate in Minnesota.

When you’re working, a 9.3% marginal state income tax rate isn’t ideal but you accept it for the job opportunities. When you’re no longer tied to a job, you think you finally get to escape it by moving to a place with no or low state taxes. That’s the motivation behind many searches for relocating to a retiree-friendly low-tax state. However, I like this tweet from Christine Benz of Morningstar on this topic:

When I think about factors influencing where to live in retirement, my list would be:

1. Proximity to family/friends
2. Culture/activities/"fit"
3. Weather
4.
5.
6. Cost of housing
7.
8.
9.
10. Taxes

But not everyone thinks that way. My latest. https://t.co/xkbcHjHl7p

— Christine Benz (@christine_benz) June 12, 2020

Taxes were very low on our list of considerations as well when we decided to relocate. We moved primarily to be closer to the destinations for the activities we enjoy. Besides, the state income tax can be completely different when you no longer have a high income. Our California state income tax last year was under $1,000, whereas we paid five figures when we were working full-time. It’s counter-productive to relocate out of a state only to escape a tax under $1,000.

Our California state income tax was low because the tax rates are progressive. A married couple first gets $9,074 as the standard deduction. Then it goes by this tax schedule:

Over –But not over –Tax$017,618$0.00 + 1.00% of the amount over $017,61841,766176.18 + 2.00% of the amount over 17,61841,76665,920659.14 + 4.00% of the amount over 41,76665,92091,5061,625.30 + 6.00% of the amount over 65,92091,506115,6483,160.46 + 8.00% of the amount over 91,506115,648590,7465,091.82 + 9.30% of the amount over 115,648

Finally, a married couple gets an exemption credit of $244. When a couple has $60k in gross income, their California state income tax is:

$659 + ($60,000 – $9,074 – $41,766) * 4% – $244 = $781

When you don’t have a big income, most of the income is taxed at 0%, 1%, and 2%. It’s a lot different than paying 9.3% on the bulk of your income when you’re working.

Out of curiosity, I did a mock tax return for all the states west of Rocky Mountains for a married couple with $60k in gross income. Besides states with no income tax (Alaska, Washington, Nevada, and Wyoming), California has the lowest income tax. That was a big surprise to me.

Some states (such as Hawaii) give special treatment to certain sources of income. Here I only did normal income without distinguishing the income types. I also only took the standard deduction in each state.

Property Tax

What about property tax? California has the famous Prop 13. The property tax increase is capped to 2% a year from the time of purchase. If you bought your home a long time ago, your property tax can be very low. Prop 60 and Prop 90 also allow someone 55 or older to sell their principal residence and transfer their low capped value to another property of equal or lesser value within the same county or in a welcoming county. Many retirees’ property tax will increase if they move to another state.

ACA Tax Credit

In addition, if you’re retired and you need ACA health insurance before you’re eligible for Medicare but your income is over the cliff for the federal premium tax credit, California kicks in with its version of the premium tax credit. With the tax credit from the state, your effective California state income tax rate can be negative 10%!

***

My takeaway from this exercise: Don’t assume. Even if you consider state taxes as an important factor for relocating after retirement, high taxes when you’re working doesn’t mean high taxes when you stop. Contrary to the perception of many people, California may very well be a retiree-friendly low-tax state.

The post Relocate Out of California to Escape High Taxes After Retirement? appeared first on The Finance Buff.

Positive Cash Flow: An Open Secret In Early Retirement

It’s been six months since the stock market touched a bottom in the coronavirus crash. It recovered nicely and fast. When the 2008 financial crisis started, I followed a path of overbalancing. After the stock market dropped 20%, I increased my allocation to stocks by five percentage points, and I increased it again by another five percentage points for each additional 10% drop. Whether the moves were right or wrong in theory, they were successful in the end. I was able to buy more stocks at low prices. Even at the bottom of the market in March 2020, the prices were still so much higher than the prices I paid in 2008 and 2009.

I didn’t overbalance again in March 2020. It wasn’t because I thought the market would never recover this time around. Overbalancing would’ve worked equally well in 2020, perhaps even better than in 2008. I didn’t do it because I’m different than I was in 2008.

I had a good-paying job in 2008. Although some people lost their jobs in the great recession, the industry I was in wasn’t hit hard. The company I worked for had a layoff, which affected 5% of the employees. The laid-off employees were able to find other jobs in short order. My salary was more than enough to cover our expenses. In other words, I had a positive cash flow outside my portfolio. My portfolio was also smaller back then. Although the percentage loss in 2008-2009 was larger than in March 2020, my loss-to-income ratio was much lower last time. Because I wasn’t relying on my investment portfolio and I could make up the loss relatively quickly with my income, I had no problem being greedy when others were fearful.

I don’t have that luxury anymore in 2020. While I still have some income from my blog and my advisor search and screening service, my income is far less than my previous salary. It doesn’t cover our expenses. While our withdrawal rate is still low, it feels a lot different than having a positive cashflow outside your portfolio and covering all your expenses with it.

Having a positive cash flow outside the portfolio is an open secret in the Financial Independence Retire Early (FIRE) circles. Despite all the headlines talking about saving 25x or 30x of annual expenses, it’s more for confidence than actually using the savings to cover expenses post-FIRE. The smart FIRE leaders don’t rely on their investment portfolio for their day-to-day spending. In theory, they can cover their expenses by withdrawing from their investment portfolio, but in reality, they don’t. They cover their expenses by their current income while leaving their portfolio untouched. Those who questioned whether FIRE will survive when the stock market crashed in March simply didn’t know how the game is played. The 4% rule doesn’t matter when you don’t withdraw at all.

This isn’t to argue whether the FIRE leaders really retired or not. It’s a lesson on how to insulate yourself from bear markets. If you have a positive cash flow outside your portfolio, you don’t worry much about bear markets. So how do you keep a positive cash flow after FIRE? Multiple ways.

Spouse’s Employment

Some couples keep one person working after FIRE. The working spouse’s employment covers the expenses and provides health insurance. Government statistics show that among working couples, 1/3 of them only have one spouse employed. When my wife quit her job in 2015, I was still working. If a bear market came but I kept my job, we wouldn’t have to worry.

Pension

Some had a pension when they retired. Doug Nordman at The Military Guide had it from the military. Fritz at The Retirement Manifesto had it from a private employer. Some employers also provide health insurance to retirees receiving a pension. Even if the pension doesn’t cover all the expenses, it still provides a nice cushion. Living lean in a bear market is also an option.

Part-Time Job

Some keep their job and only drop down to part-time. The part-time job can provide income and health insurance. Bianca planned to do that in her flight attendant job (This flight attendant has enough money saved to retire at 44, but she wants to keep working, MarketWatch).

Rental Properties

Living on income from rental properties is another popular option. Chad Carson has a book and a course teaching people how to retire early on rental properties.

Self-Employment

The most famous early retiree Mr Money Mustache arguably never withdrew from his investment portfolio after he retired at 30. He used self-employment income, first from fixing and flipping houses, then from blogging. Leif at Physician On FIRE just posted his 2019 tax return. He had a negative withdrawal rate because his self-employment income covered his expenses. He didn’t worry when the value of his investment portfolio dropped by $1 million in March. That’s the power of having a positive cash flow outside the portfolio.

If you only have a job, you’re vulnerable to recessions and unemployment, as many have experienced in the COVID-19 pandemic. If you only have an investment portfolio, you’re vulnerable to prolonged bear markets. When you have both an investment portfolio and a positive cash flow outside the portfolio, you’re financially more secure. That’s the smart way to do FIRE.

***

[Update] Long-time blogger J.D. Roth wrote this note when he shared this post on Apex Money:

As a FIRE insider, I can say that this is generally 100% true. Except for me and Doug Nordman, most FIRE folks support themselves with actual income.

The post Positive Cash Flow: An Open Secret In Early Retirement appeared first on The Finance Buff.

Positive Cash Flow: Open Secret In Early Retirement

It’s been six months since the stock market touched a bottom in the coronavirus crash. It recovered nicely and fast. When the 2008 financial crisis started, I followed a path of overbalancing. After the stock market dropped 20%, I increased my allocation to stocks by five percentage points, and I increased it again by another five percentage points for each additional 10% drop. Whether the moves were right or wrong in theory, they were successful in the end. I was able to buy more stocks at low prices. Even at the bottom of the market in March 2020, the prices were still so much higher than the prices I paid in 2008 and 2009.

I didn’t overbalance again in March 2020. It wasn’t because I thought the market would never recover this time around. Overbalancing would’ve worked equally well in 2020, perhaps even better than in 2008. I didn’t do it because I’m different than I was in 2008.

I had a good-paying job in 2008. Although some people lost their jobs in the great recession, the industry I was in wasn’t hit hard. The company I worked for had a layoff, which affected 5% of the employees. The laid-off employees were able to find other jobs in short order. My salary was more than enough to cover our expenses. In other words, I had a positive cash flow outside my portfolio. My portfolio was also smaller back then. Although the percentage loss in 2008-2009 was larger than in March 2020, my loss-to-income ratio was much lower last time. Because I wasn’t relying on my investment portfolio and I could make up the loss relatively quickly with my income, I had no problem being greedy when others were fearful.

I don’t have that luxury anymore in 2020. While I still have some income from my blog and my advisor search and screening service, my income is far less than my previous salary. It doesn’t cover our expenses. While our withdrawal rate is still low, it feels a lot different than having a positive cashflow externally and covering all your expenses with it.

Having a positive cash flow outside the portfolio is an open secret in the Financial Independence Retire Early (FIRE) circles. Despite all the headlines talking about saving 25x or 30x of annual expenses, it’s more for confidence than actually using the savings. The smart FIRE leaders don’t rely on their investment portfolio for their day-to-day spending. In theory, they can cover their expenses by withdrawing from their investment portfolio, but in reality, they don’t. They cover their expenses by their current income while leaving their portfolio untouched. Those who questioned whether FIRE will survive when the stock market crashed in March simply didn’t know how the game is played. The 4% rule doesn’t matter when you don’t withdraw at all.

This isn’t to argue whether the FIRE leaders really retired or not. It’s a lesson on how to insulate yourself from bear markets. If you have a positive cash flow outside your portfolio, you don’t worry much about bear markets. So how do you keep a positive cash flow after FIRE? Multiple ways.

Spouse’s Employment

Some couples keep one person working after FIRE. The working spouse’s employment covers the expenses and provides health insurance. Government statistics show that among working couples, 1/3 of them only have one spouse employed. When my wife quit her job in 2015, I was still working. If a bear market came but I kept my job, we wouldn’t have to worry.

Pension

Some had a pension when they retired. Doug Nordman at The Military Guide had it from the military. Fritz at The Retirement Manifesto had it from a private employer. Some employers also provide health insurance to retirees receiving a pension. Even if the pension doesn’t cover all the expenses, it still provides a nice cushion. Living lean in a bear market is also an option.

Part-Time Job

Some keep their job and only drop down to part-time. The part-time job can provide income and health insurance. Bianca planned to do that in her flight attendant job (This flight attendant has enough money saved to retire at 44, but she wants to keep working, MarketWatch).

Rental Properties

Living on income from rental properties is another popular option. Chad Carson has a book and a course teaching people how to retire early on rental properties.

Self-Employment

The most famous early retiree Mr Money Mustache arguably never withdrew from his investment portfolio after he retired at 30. He used self-employment income, first from fixing and flipping houses, then from blogging. Leif at Physician On FIRE just posted his 2019 tax return. He had a negative withdrawal rate because his self-employment income covered his expenses. He didn’t worry when the value of his investment portfolio dropped by $1 million in March. That’s the power of having a positive cash flow outside the portfolio.

If you only have a job, you’re vulnerable to recessions and unemployment, as many have experienced in the COVID-19 pandemic. If you only have an investment portfolio, you’re vulnerable to prolonged bear markets. When you have both an investment portfolio and a positive cash flow outside the portfolio, you’re financially more secure. That’s the smart way to do FIRE.

The post Positive Cash Flow: Open Secret In Early Retirement appeared first on The Finance Buff.

2020 2021 401k 403b 457 TSP IRA FSA HSA Contribution Limits

[Updated in August 2020 after July inflation release.]

Retirement plan contribution limits are adjusted for inflation each year. While inflation dipped in April due to the COVID-19 pandemic, it has rebounded in recent months. The contribution limits for 2021 are no longer at risk of going down. Most of the limits will stay the same as in 2020. Some income limits will go up slightly.

Before the IRS publishes the official numbers in October or November, I’m able to make my own calculations using the published inflation numbers and going by the same rules the IRS uses as stipulated by law. Before I have the inflation numbers for all the months used in the formula, due to rounding rules I can project the contribution limit for next year with high confidence. The inflation numbers in the months to come just aren’t able to make the limits cross another rounding threshold. For example when the law says a limit must be rounded down to the nearest $500, and the calculated result comes to $6,200, I know even if it’s off a little, it isn’t going to go below $6,000 or go above $6,500.

I have been able to do early projections with 100% accuracy ever since I started doing them several years ago.

401k/403b/457/TSP Elective Deferral Limit

401k/403b/457/TSP contribution limit will stay the same at $19,500 in 2021 as in 2020. If you are age 50 or over, the catch-up contribution limit will also stay the same at $6,500 in 2021 as in 2020.

Employer match or profit sharing contributions aren’t included in these limits. If you work for multiple employers in the same year or if your employer offers multiple plans, you have one single limit for 401k, 403b, and TSP across all plans. The 457 plan limit is separate. You can contribute the maximum to both a 401k/403b/TSP plan and a 457 plan.

Annual Additions Limit

The total employer plus employee contributions to all defined contribution plans by the same employer will increase by $1,000 from $57,000 in 2020 to $58,000 in 2021. The age-50-or-over catch-up contribution is on top of this limit. If you work for multiple unrelated employers in the same year, you have separate limits at each employer.

Annual Compensation Limit

The maximum annual compensation that can be considered for making contributions to a retirement plan is always 5x the annual additions limit. Therefore the annual compensation limit will increase by $5,000 from $285,000 in 2020 to $290,000 in 2021.

Highly Compensated Employee Threshold

If your employer limits your contribution because you are a Highly Compensated Employee (HCE), the minimum compensation will stay the same at $130,000 in 2021 as in 2020.

SIMPLE 401k and SIMPLE IRA Contribution Limit

SIMPLE 401k and SIMPLE IRA plans have a lower limit than standard 401k plans. The contribution limit for SIMPLE 401k and SIMPLE IRA plans will stay the same at $13,500 in 2021 as in 2020. If you are age 50 or over, the catch-up contribution limit will also stay the same at $3,000 in 2021 as in 2020. Employer contributions aren’t included in these limits.

Traditional and Roth IRA Contribution Limit

Traditional and Roth IRA contribution limit will stay the same at $6,000 in 2021 as in 2020. The age 50 catch-up limit is fixed by law at $1,000 in all years. The IRA contribution limit and the 401k/403b/TSP or SIMPLE contribution limit are separate. You can contribute the respective maximum to both a 401k/403b/TSP/SIMPLE plan and a traditional or Roth IRA.

Deductible IRA Income Limit

The income limit for taking a full deduction for your contribution to a traditional IRA while participating in a workplace retirement will increase by $1,000 for singles, from $65,000 in 2020 to $66,000 in 2021, and it will also increase by $1,000 for married filing jointly, from $104,000 in 2020 to $105,000 in 2021. The deduction completely phases out when your income goes above $75,000 in 2020 and $76,000 in 2021 for singles; and $124,000 in 2020 and $125,000 in 2021 for married filing jointly.

The income limit for taking a full deduction for your contribution to a traditional IRA when you are not covered in a workplace retirement but your spouse is will go up by $2,000 for married filing jointly from $196,000 in 2020 to $198,000 in 2021. The deduction completely phases out when your joint income goes above $206,000 in 2020 and $208,000 in 2021.

Roth IRA Income Limit

The income limit for contributing the maximum to a Roth IRA will go up by $1,000 for singles from $124,000 in 2020 to $125,000 in 2021. It will go up by $2,000 for married filing jointly from $196,000 in 2020 to $198,000 in 2021. You can’t contribute anything directly to a Roth IRA when your income goes above $139,000 in 2020 and $140,000 in 2021 for singles, and $206,000 in 2020 and $208,000 in 2021 for married filing jointly, up by $1,000 and $2,000 respectively in 2021. You can still do a backdoor Roth IRA in such case.

Healthcare Flexible Spending Account Contribution Limit

The Healthcare FSA contribution limit will stay the same at $2,750 per person in 2021 as in 2020.

Health Savings Account Contribution Limit

The HSA contribution limit for single coverage will go up by $50 from $3,550 in 2020 to $3,600 in 2021. The HSA contribution limit for family coverage will go up from $7,100 in 2020 to $7,200 in 2021. These were announced previously in the spring. Please see 2019 2020 2021 HSA Contribution Limits.

Those who are 55 or older can contribute additional $1,000. If you are married and both of you are 55 or older, each of you can contribute the additional $1,000, but to separate HSAs in each person’s name.

Saver’s Credit Income Limit

The income limits for receiving a Retirement Savings Contributions Credit (“Saver’s Credit”) will increase in 2021. For married filing jointly, it will be $39,000 in 2020 and $39,500 in 2021 (50% credit), $42,500 in 2020 and $43,000 in 2021 (20% credit), and $65,000 in 2020 and $66,000 in 2021 (10% credit). The limits for singles will be at half of the limits for married filing jointly, at $19,500 in 2020 and $19,750 in 2021 (50% credit), $21,250 in 2020 and $21,500 in 2021 (20% credit), and $32,500 in 2020 and $33,000 in 2021 (10% credit).

All Together



 20202021IncreaseLimit on employee contributions to 401k, 403b, or 457 plan$19,500$19,500NoneLimit on age 50+ catchup contributions to 401k, 403b, or 457 plan$6,500$6,500NoneSIMPLE 401k or SIMPLE IRA contributions limit$13,500$13,500NoneSIMPLE 401k or SIMPLE IRA age 50+ catchup contributions limit$3,000$3,000NoneHighly Compensated Employee definition$130,000$130,000NoneMaximum annual additions to all defined contribution plans by the same employer$57,000$58,000$1,000Traditional and Roth IRA contribution limit$6,000$6,000NoneTraditional and Roth IRA age 50+ catchup contribution limit$1,000$1,000NoneDeductible IRA income limit, single, active participant in workplace retirement plan$65,000 – $75,000$66,000 – $76,000$1,000Deductible IRA income limit, married, active participant in workplace retirement plan$104,000 – $124,000$105,000 – $125,000$1,000Deductible IRA income limit, married, spouse is active participant in workplace retirement plan$196,000 – $206,000$198,000 – $208,000$2,000Roth IRA income limit, single$124,000 – $139,000$125,000 – $140,000$1,000Roth IRA income limit, married filing jointly$196,000 – $206,000$198,000 – $208,000$2,000Healthcare FSA Contribution Limit$2,750$2,750NoneHSA Contribution Limit, single coverage$3,550$3,600$50HSA Contribution Limit, family coverage$7,100$7,200$100HSA, age 55 catch-up$1,000$1,000None

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2020 2021 ACA Health Insurance Premium Tax Credit Percentages

If you buy health insurance from healthcare.gov or a state-run ACA exchange, whether you qualify for a premium tax credit is determined by your income relative to the Federal Poverty Level (FPL). You don’t qualify for a premium tax credit if your income is above 400% of FPL. That’s a hard cutoff. See Stay Off the ACA Premium Subsidy Cliff.

If you do qualify for a premium tax credit, how much credit you qualify is determined by a sliding scale set each year by the government. The government says based on your income, you are supposed to pay this percentage of your income toward a second lowest-cost Silver plan in your area. After you pay that amount, the government will take care of the rest. If you pick a less expensive policy than the second lowest-cost Silver plan, you keep 100% of the savings. If you pick a more expensive policy than the second lowest-cost Silver plan, you pay 100% of the difference.

That sliding scale is called the Applicable Percentage Table. The numbers are adjusted each year. In 2020, people with income between 300% and 400% of Federal Poverty Level are expected to pay 9.78% of their income toward a second lowest-cost Silver plan in their area. That number is going to change to 9.83% for 2021.

Here are the numbers for different income levels in 2020 and 2021:

Income20202021< 133% FPL2.06%2.07%< 150% FPL3.09% – 4.12%3.10% – 4.14%< 200% FPL4.12% – 6.49%4.14% – 6.52%< 250% FPL6.49% – 8.29%6.52% – 8.33%< 300% FPL8.29% – 9.78%8.33% – 9.83%9.78%9.83%

Source: IRS Rev. Proc. 2019-29, Rev. Proc. 2020-36

As you see from the table above, the changes between 2020 and 2021 are quite minimal. The percentage of income the government expects you to pay toward a second lowest-cost Silver plan depends on your income relative to the Federal Poverty Level. To calculate where your income falls relative to the Federal Poverty Line, please see Federal Poverty Levels (FPL) For Affordable Care Act (ACA).

If your income is low, they expect you to pay a low percentage of your low income. As your income goes higher, they expect you to pay a higher percentage of your higher income. The higher percentage applies not just to the additional income but to your entire income. A higher income times a higher percentage is much more than a lower income times a lower percentage. For example, a household of two in the lower 48 states is expected to pay 7.82% of their income when their 2020 income is $40,000. If they increase their income to $50,000, they are expected to pay 9.66% of their income. The increase of their expected contribution toward ACA health insurance, and the corresponding decrease in their premium tax credit will be:

$50,000 * 9.66% – $40,000 * 7.82% = $1,702

This represents 17% of the $10,000 increase in their income. For a married couple, the effect of paying 17% of the additional income toward ACA health insurance is greater than the effect of paying 12% toward federal income tax. Normally it’s a good idea to consider Roth conversion or harvesting tax gains in the 12% tax bracket, but those moves become much less attractive when you receive a premium subsidy for ACA health insurance. For a helpful tool that can calculate this effect, please see Tax Calculator With ACA Health Insurance Subsidy.

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Life Hack: Donate To Charities Without Getting Junk Mail

Here’s a problem. You’d like to donate some cash to a charity but you’re concerned that the charity will put you on their mailing list and keep asking for more donations. Worse yet, because some charities share their mailing list with other charities, donating to one charity may get you on the mailing list of multiple charities. Your dislike for getting marketing mail may hold you back from making that donation in the first place.

People who have a Donor-Advised Fund (DAF) solve that problem by donating to their Donor-Advised Fund and requesting a grant to the charity from their Donor-Advised Fund. But you need a minimum to open a Donor-Advised Fund account ($5,000 at Fidelity; $25,000 at Vanguard). You also have to pay an administrative fee every year. It’s an overkill if you only want to donate some cash to a charity.

I found a life hack to donate money to charities without worries about getting junk mail. It’s simple and free.

Charity Gift Card

TisBest Philanthropy in Seattle runs a charity gift card program. TisBest itself is a 501(c)(3) nonprofit organization with a mission to encourage people to give gifts of charity, as opposed to gifts of stuff. Other than having used TisBest once as a user, I have no financial relationship with TisBest. This is not a sponsored post.

A gift giver buys a TisBest Charity Gift Card and sends it to the gift recipient, for birthdays, holidays, graduation, wedding, and what not. Instead of using the gift card to buy something, the gift recipient picks a charity and designates the gift to that charity.

100% of the gift card value goes to the charity picked by the gift recipient. The gift giver still gets the full tax deduction. TisBest covers the administration costs with money from its own donors. There is no purchase fee if you get the gift card code by email or print a paper gift card on your own printer. If you want a plastic card, it’s only $1.95 extra to have it mailed either to the purchaser or to the recipient.

Someone sent me a TisBest Charity Gift Card recently. I went to TisBest’s website and picked a charity for the money. It was a simple process.

Privacy Protection

While the TisBest Charity Gift Card works great for its intended purpose, I think it also works well for donating money to a charity yourself while protecting your privacy. You buy a TisBest Charity Gift Card and have the gift card code emailed to yourself. Then you “spend” the gift card on a charity of your choice. TisBest will pool all donations to that charity from all its users and send a lump sum to the charity each quarter. TisBest won’t share your information with the charity. Other than a time delay, the charity you choose still receives 100% of your donation. From TisBest’s FAQs:

Do you give names and contact information to the charities? Whose name is the donation made in?

We understand the problem with unwanted phone and mail solicitations, so we do not share any customer names or contact information with charities unless you ask us to. Donations are made from TisBest Philanthropy. If you want to register with a charity to receive their mailings, we will offer you that opportunity after you have spent your gift card.

TisBest has a directory of featured charities. The list covers major charities in many different causes. If the one you’d like to support isn’t in the featured list, TisBest also uses a database of all U.S. charities. You can use the search feature to find it.

If you’d like to donate money to more charities but you hesitated because you hate junk mail, now you can use TisBest as a “poor person’s Donor-Advised Fund.” Donate to your heart’s desire with no worries about junk mail. Several other organizations also run similar charity gift card programs. TisBest is the only one I saw that forwards 100% of your donations to the designated charities.

Reference: TisBest FAQs

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Can 401k and IRA Contribution Limits Go Down If We Have Deflation?

The annual 401k and IRA contribution limits are adjusted for inflation each year. Due to rounding, the limits can stay the same from one year to the next when there isn’t enough inflation. The coronavirus pandemic brought the prospect of deflation. The Consumer Price Index dropped in April. It was flat in May, and it rebounded in June due to a sharp increase in gas prices. A reader asked me whether the 401k and IRA contribution limits in 2021 can go down from their 2020 levels if we have deflation.

The short answer is yes. If we have bad enough deflation, the contribution limits can go down.

The Base Year

The 401k and IRA contribution limits and many other limits in the tax law were set to a round number at a starting point. Then they started adjusting for inflation in subsequent years. You take the inflation number in a later year and compare it to the inflation number at the starting point (the base year). Then you round the calculated results.

Different limits use different specific inflation indexes, different time periods for the comparison, and different rounding methods. Some limits use the CPI-U index, while some others use the Chained CPI-U index. Some limits use a 12-month average as of August of each year, and some other limits use the average in the third quarter. Some limits are rounded down to a nearest threshold, and some other limits are rounded either up or down to a nearest threshold.

For example, suppose a [hypothetical] limit was set to $10,000 in the base year, and the inflation number at that time was 123.456. Then if in year two the inflation number is 125.678, the new limit before rounding is:

$10,000 * 125.678 / 123.456 = $10,180

If this limit is rounded down to the nearest $100, the new limit in year two becomes $10,100.

Now if in year three the inflation number is 128.901, the new limit before rounding is:

$10,000 * 128.901 / 123.456 = $10,441

After rounding down to the nearest $100, the new limit in year three is $10,400.

Notice the calculation in any future year always compares with the inflation number in the base year (123.456 in our hypothetical example). The limit in year three does not depend on the limit in year two. If the inflation number is low enough in year three, it’s possible the limit in year three will be lower than the limit in year two.

Hold Harmless Rule?

Social Security benefits have a “hold harmless” rule. If the Social Security benefits will otherwise go down due to inflation adjustment and/or an increase in the Medicare Part B premium, the benefits are held to the same level in the previous year. This was put in to make sure Social Security recipients don’t receive less from year to year.

There is no “hold harmless” rule in 401k or IRA contribution limits. The inflation adjustment and rounding calculation only compares with the base year. It doesn’t matter what the limit was in the previous year. If the calculation makes the limit lower due to deflation, so be it.

401k and IRA Contribution Limits in 2021

Now, the 401k and IRA contribution limits specifically are rounded down to the nearest $500. It so happened that the 401k contribution limit before rounding only got barely above $19,500 in 2020 (add $6,500 catch-up for age 50 and over). Deflation can push the 401k and its catch-up numbers below the current $19,500 and $6,500 thresholds. If the raw numbers before rounding are $19,497 and $6,496 respectively, then the rounding rule will make the new 401k limits for 2021 go back to $19,000 for under age 50 and extra $6,000 catch-up for age 50 and over.

By my calculation, if inflation in the upcoming months averages to -4.5% annual rate or lower, the 401k contribution limit for 2021 will go back to $19,000 for under age 50 and extra $6,000 catch-up for age 50 and over. That’s not very likely though. If inflation in the upcoming months isn’t that low, the limits for 2021 will stay the same as in 2020. Either way there’s almost no chance for an increase.

The IRA contribution limit has a little more room above the threshold. It first got to $6,000 for under age 50 in 2019. It got up a little more in 2020 before being rounded down to the same $6,000. So it will take larger deflation for the IRA contribution limit for 2021 to go back to $5,500. It can happen theoretically, but I don’t think it’s likely. In all likelihood the IRA contribution limit for 2021 will still be $6,000 for under age 50. The $1,000 catch-up for age 50 and over is hard coded in the law; it doesn’t adjust for inflation.

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How To Pay Off SBA COVID-19 EIDL Loan Early: A Walkthrough

Back in March, Congress created two loan programs to help small businesses and the self-employed mitigate the economic impact of the COVID-19 pandemic: the Economic Injury Disaster Loan (EIDL) and the Paycheck Protection Program (PPP). Because we were not sure whether we were able to get either loan, we applied for both (see previous post COVID-19 Loans for Self-Employed: Where to Apply). We ended up getting both loans after a long application process — the EIDL loan directly through the SBA, and the PPP loan through a bank.

Our business stabilized somewhat in recent months. Revenue was down 65% in April compared to April of last year. It was down only 47% in June. It’s still bad but the trend is upward. So we decided to pay off the EIDL loan early.

EIDL Loan Is Not Forgivable

The EIDL loan is a 30-year loan at a 3.75% interest rate. No payments are required during the first year but interest still accrues. Except for the EIDL grant ($1,000 per employee up to $10,000), the EIDL loan is not forgivable.

https://www.sba.gov/funding-programs/disaster-assistance/coronavirus-covid-19

Therefore if you no longer need the cash, it’s better to pay it back early to stop the interest. There’s no prepayment penalty. When no payments are due yet, the SBA isn’t sending any statement or payment stub. If you’d like to pay the loan off, it’s not obvious how much you need to pay or where to send the payment. I’m showing you what to do if you received the EIDL loan and you’d like to pay it off early or pay back a part of the loan to lower your interest charge.

SBA Loan Number

First, you need the SBA loan number for your EIDL loan. This 10-digit number is in the Loan Authorization and Agreement (LA&A) you electronically signed with the SBA. It’s at the beginning of page 2 and also on the upper left of all pages in that document.

If you didn’t save the document you electronically signed with the SBA, you can go back to the EIDL loan portal at https://covid19relief1.sba.gov and sign in with the email and password you created. If you forgot the password, there’s a “forgot your password” link on the login page.

After you log in, you can re-download the signed loan document.

If you still can’t get into the loan portal, please call the SBA EIDL customer service center at 800-659-2955 or email disastercustomerservice@sba.gov.

SBA CAFS

Next, you need to register with the SBA’s Capital Access Financial System (CAFS). This is similar to the online banking site when you have a loan with a bank. If you have problems registering for online access, please scroll down for how to contact SBA’s Disaster Loan Servicing Center by phone.

Click on the “Not Enrolled?” link above the login fields.

Choose “Borrower” under User Type.

After entering your zip code, click on the Lookup Zip button.

Enter your SBA loan number in the “Financial Commitment ID” field.

Payoff Amount

After you successfully register for access, you log in to CAFS with the user ID and password you created. The system will send a one-time PIN to your email address or mobile phone for two-factor authentication. After you get in, at the light blue bar at the top, click on Borrower, and then Borrower Search.

You will see a list of your loans. If you received both the EIDL loan and the PPP loan, you can identify your EIDL loan by the loan number, the loan amount, or the loan type (“DCI”). Click on the EIDL loan. You will see your loan details. If you are trying to pay the loan off, read the Payoff Balance during working hours Monday through Thursday.

Further down the page, you will see a link that says “Go to pay.gov to make a payment.” So you go there next.

Pay.gov

The link just sends you to the home page of pay.gov. This is a multi-purpose website for making many different kinds of payments to the U.S. government. You will see this in the middle of the home page:

You follow that link even though you don’t really have a payment notice (Form 1201) from the SBA. When you follow along, the crucial information you need are your SBA loan number and the payment amount.

If you are trying to pay the loan off, enter the payoff amount you got from SBA CAFS (you can also make a partial payment). The soonest payment date is the next business day. That’s why if you are trying to pay it off, you need the latest payoff amount during the working hours Monday through Thursday. If you get the payoff amount in the evening or on a Friday, by the time the payment arrives, additional interest may have accrued and your payment will be short.

You will give the routing number and account number of a bank account for the payoff. Pay.gov will debit your account and send the payment to the SBA. You can go back to SBA CAFS after a few days to verify the payment and the loan status.

You are done when you see the loan status says “Paid in Full.”

SBA Disaster Loan Servicing Center

If you have problems enrolling in CAFS to view your payoff balance and loan status, you can also try calling SBA’s Disaster Loan Servicing Center. I haven’t called them myself because I was able to get into CAFS. I only found the information on SBA’s website.

SBA has two Disaster Loan Servicing Centers, one in Birmingham, AL, the other in El Paso, TX. Your loan may be assigned to one of the two centers. Or maybe either center will be able to tell you the payoff balance and verify that your loan is paid in full. The Loan Servicing Center also takes payments by phone.

Birmingham Loan Servicing Center
Phone: 800-736-6048
Hours of Operation: Monday – Friday 8:00 a.m. to 4:30 p.m. (CST)
Email: birminghamdlsc at sba dot gov

El Paso Loan Servicing Center
Phone: 800-487-6019
Hours of Operation: Monday – Friday 8:00 a.m. to 4:30 p.m. (MST)
Email: elpasodlsc at sba dot gov

The post How To Pay Off SBA COVID-19 EIDL Loan Early: A Walkthrough appeared first on The Finance Buff.

2021 California ACA Health Insurance Premium Subsidy

Update on July 3, 2020: New California state budget for 2021 preserved funding for the state premium assistance. The program design for 2021 carried over the same design from 2020.

Ever since the Affordable Care Act came out, some people who buy health insurance on the ACA exchange have to watch carefully for the premium subsidy cliff. The Premium Tax Credit is cut off at 400% Federal Poverty Level. If your income is $1 higher than the cutoff, you lose all the premium subsidy, which can be well over $10,000 depending on your age and your household size.

If you live in California, you may be able to breathe a sigh of relief in the next few years. California passed a law in 2019 that extends the premium subsidy to 600% Federal Poverty Level (FPL) for three years starting in 2020. California will pick up where the federal government leaves off. News media such as Los Angeles Times reported this in California Gov. Gavin Newsom has signed his first budget. Here’s where the $215 billion will go:

“Based on federal guidelines, subsidies will be available starting in January to individuals earning up to almost $75,000 a year and families of four earning as much as $154,500. The subsidies to purchase health insurance will be highest for those who earn the least, with the lowest earners eligible for enough financial assistance to pay their entire monthly premiums.”

However, in typical treatment by news media, they don’t tell you the details. Subsidies will be available. How much can people expect? If you want to know how the California state subsidies really work, you have to come to my blog.