Category: 401(k) Resources

Find easy to understand 401(k) Resources and information from Ubiquity Retirement + Savings. Find easy to understand rules and regulations, along with tips and advice from our team of 401(k) experts. Free consultation! Call Ubiquity today at 855.466.5825

Curious how much you can invest toward your retirement in 2021?

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The IRS has announced the 2021 contribution limits for retirement and health savings accounts. This includes contribution limits for 401(k) and 403(b) plans, income limits for IRA contribution deductibility, and the salary threshold to classify “key” and “highly compensated employees”

While contribution limits won’t increase from 2020 to 2021, there is still some good news for retirement savers. The maximum income levels allowed to make deductible contributions to traditional IRAs and to contribute to Roth IRAs, have both increased for 2021.

Let’s take a look at the updated limits below:

2021 401(k) and 403(b) individual contribution limits (IRS 402(g) Limit)

Age 49 and under


Age 50 and older

Additional $6,500

The IRS has also set limits for the total amount that may be contributed to your retirement savings 401(k) account from all sources combined (IRS section 415 limit). This includes any employer matching or profit-sharing contributions, and any employee after-tax contributions. For 2021, this limit has increased from $57,000 to a new maximum of $58,000.

Every plan is different, so it’s important to refer to your Plan Document for any compensation or other applicable limits.

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2021 Highly Compensated and Key Employee definitions and limits

Key Employee Officer Compensation


Highly Compensated Employee


Annual Compensation Limit


2021 Roth and Traditional IRA contribution limits

Age 49 and under

Up to $6,000 (must have earned income)

Age 50 and older

Additional $1,000

2021 Traditional IRA modified adjusted gross income limit for partial deductibility



Married – Filing joint returns


Married – Filing separately


Non-active participant spouse


2021 Roth IRA modified adjusted gross income phase-out ranges



Married – Filing joint returns


Married – Filing separately


2021 Simple IRA contribution limits

Age 49 and under


Age 50 and older


2021 Health Savings Accounts (HSA) contribution limits

Individual (employer + employee)


Family (employer + employee)


Age 55 or older**

Additional $1,000

**Catch-up contributions can be made at any time during the year in which the HSA participant turns 55.

If you need more detailed guidance, see IRS Notice 2020-79.

Recessions can bring financial hardship, whether it’s unemployment, rent increases, sudden alimony and child support payments due to divorce, or the increased price of goods. It can be tempting to think of your 401(k) as “a big pile of money sitting there, ripe for the taking” – particularly if you’re facing rising household debt and the pressure of job loss. Before you throw away future security for greater peace of mind today, consider all your options for managing a 401(k) wisely during a recession.

Manage Your Minimum 401(k) Distributions

If you would normally be required to take minimum distributions because you are over 70.5 years old, you can now forgo the distribution and let it grow another year, so you won’t have to sell your investments at a time of lower return. Reducing the distribution can also reduce your income tax liability for 2020.

Ready to benefit from the tax benefits of an IRA or 401(k)?

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Pull Back What You Add from Each Paycheck

Another option to increase the amount of cash you have on hand during the recession is to pull back on what you add to retirement from each paycheck. While you are legally allowed to contribute up to $19,500 (or $26,000 if you’re over 50) into your 401(k) account, you don’t have to contribute that much if it doesn’t suit your needs and goals right now.

You want to at least contribute enough to get the maximum employer match, as the matching funds are not counted toward the IRS limit. Before you adjust, think about what you might need.

How much you’ll need in retirement depends upon when you plan to retire, how much of your current income you’d like to replace, and how much you trust that Social Security funds will be available. A good rule of thumb is to invest enough to get the employer match and bump it up 1-2 percent a year. If there is no employer match, you can start with the IRA contribution limit of $6,000 a year as a minimum guide.

Consider Loans and Hardship Withdrawals Carefully.

If money is extremely tight right now and you’re under 59.5 years of age, you may contact your plan provider to discuss the possibility of taking an early withdrawal from your 401(k) distribution.

In 2020, the 10% penalty for early distributions has been waived. You can take out up to 100% of your vested balance up to $100,000. Payments can be delayed for up to one year, but you’ll want to pay yourself back within three years. The taxes can be evenly spread out over 2020, 2021, and 2022, but you can claim a refund on those taxes if you repay yourself in full.

Most people who borrow from their retirement accounts end up with an outstanding balance after five years. You could be on the hook for a huge tax liability and a penalty charge while you’re still struggling. Worse yet, you won’t be making new contributions while the balance is outstanding, so the value of your plan shrinks considerably during that time.

Talk to a Retirement Expert

There is no substitute for professional financial advice if you’re worried about your present and future. A diversified, long-term strategy is the best way to weather a recession, as time has proved. Chart your course, but stay your course.

Ask your employer how to get in touch with a financial advisor through their plan, as this conversation can take place at no cost to you. Ubiquity is a low-cost 401(k) plan provider that caters to the needs of start-ups, small businesses, and solopreneurs. Talk to us today for affordable, flat-fee plans.

The sluggish economy may have you feeling anxious about your current tax burden and future retirement income.

Fortunately, employers and employees with a 401(k) plan in place can take advantage of considerable savings, especially with some of the provisions in the recently passed SECURE Act. During a recession, you may want to pull back on what you add to your 401(k) out of each paycheck, so long as you maintain enough in your account to receive the employer match.

How to Take Advantage of SECURE Act Savings in 2020

Individuals have new options for saving and using their 401(k)s:

  • Savers can wait until age 72 to take required minimum distributions. You used to have to take RMDs at age 70.5, but now you can allow your investments to increase for another year and a half.
  • Savers who inherit a 401(k) must withdraw the entire balance within 10 years of the account’s owner, with a few exceptions. In the past, you could stretch distributions and tax payments over a lifetime.
  • Part-time employees who have completed at least 500 hours of service per year for three consecutive years can enroll in a 401(k). In the past, you needed twice as many hours to be eligible.
  • Penalty-free withdrawals are allowed for birth/adoption expenses (up to $5,000 per child), student loan expenses (up to $10,000 from a 529), and hardship (up to $100,000).

NEW in 2020, business owners are able to save more at tax-time, thanks to these SECURE Act provisions:

  • Small business owners with 100 or fewer employees who start a new plan can take advantage of extra tax credits – 50% of their costs (up to a maximum of $5,000 per year for three years), plus an extra $500 credit for three years if they choose auto-enrollment.
  • It’s now easier to switch to a Safe Harbor 401(k) mid-year. The new legislation eliminates the Safe Harbor notice requirement, permits a 401(k) plan to add a 3% nonelective contribution at any time up to 30 days before the close of the year, and allows a 4% or higher nonelective contribution up until the last day of the plan year.

How to Maximize Your 401(k) Tax Deductions in 2020

As always, the 401(k) retirement investment vehicle allows generous cost-saving deductions:

Business owners may take tax deductions for their contributions, as well as their employees’ contributions to the plan. Deductions are also allowed for plan expenses paid.
Employees can choose to make pre-tax contributions, which are not included in the taxable income for the year, therefore lowering their taxable income – and possibly their tax bracket. Taxes are paid gradually, as the 401(k) money is taken out in retirement. If the 401(k) plan permits, Roth contributions can be deducted from paychecks after tax has been paid, so these contributions are tax-free when withdrawn from the plan. A tax credit of up to $1,000 is available for low-to-moderate income taxpayers.

How to Change Your 401(k) Distribution in 2020

Employees may contact their company’s Human Resources Department to change their 401(k) distribution. Employers can contact their 401(k) plan provider to explore their options.

For instance, if the stock market is particularly volatile, they may want to consider a portfolio that minimizes volatility with a slightly different allocation. Remaining invested and diversified is the best path to weathering the storm. Now is a great time to look for stock bargains – ones that may have taken a hit with the crash, but will rebound along with the economy.

A 401(k) has flexible plan features that allow business owners to tailor a plan to their specific objectives, whether it’s running a program at minimal cost, generously rewarding long-term employees, or maximizing tax benefits on plan contributions.

For employees, 401(k) benefits allow higher contribution limits than most other savings plans, with up to $19,500 in tax-free salary deductions allowed for 2020, along with the employee matching contributions (that’s FREE money!) up to $57,000 total. Investors over 50 can contribute an additional $6,500 on top of this sum to “catch up.”

Call Ubiquity to learn more about maximizing your 401(k) savings.

These are “rare and unprecedented times,” as countless newspaper articles suggest. The global pandemic has Americans taking a closer look at their finances to see where nickels and dimes can be scraped up, and where resources can be allocated for the future. Here are four smart money moves you can make in 2020 — pertaining specifically to your 401(k).

1. Let your nest egg grow.

Resist the urge to pull all your money out of the market.

There are two enemies to your secure financial future in this pandemic – coronavirus and human behavior. The human element is one aspect that can be controlled. Emotional reactions will hurt your finances in the long run. The Stock Market rarely moves continuously in one direction or the other. It jumps in fits and spurts, climbs and dips, drops and then rebounds.

Opportunity cost is the main reason investors advise against taking cash out of the Stock Market, as you lose the chance for these dollars to grow and compound while invested. Pulling money out of the stock market requires a comparison between the growth of your cash portfolio (which will be negative over the years, as inflation erodes your purchasing power) and the potential gains in the Stock Market (which averages 7% over a 10-year period).

Cut through the complexity of choosing and customizing the right 401(k) for your small business. Get an instant quote.

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2. Rebalance your 401(k) account portfolio.

On the other hand, asset allocation and diversification still work. A balanced portfolio of stocks, bonds, and cash will take care of you in retirement. Financial planners recommend that you rebalance your 401(k) investments at least once a year, but you can make adjustments up to four times in a more aggressive growth strategy.

Check your account statement for a pie chart to see how your money is invested. When you are 5% or more off your initial target, it’s time to rebalance. If you don’t have access to a pie chart, you can calculate what percentage each category represents of the total value, buying and selling from the largest category to get closer to your original asset allocation percentages.

For instance, if you initially allocated 40 percent of your portfolio to bonds and 60 percent to equity funds, but it shifts to 30 percent bonds and 70 percent equity funds, you should shift 10 percent back to bonds. The market currently offers unique opportunities to sell off some of your gains and buy assets that are undervalued.

If this all sounds like another language to you, consider taking advantage of Ubiquity’s CensiblyYours® Custom Index Portfolios, which allocates resources based on risk profile.

3. Get free cash from your employer.

Half of US employers offering a 401(k) also offer to match employee contributions. Employers match contributions to encourage employee participation in their plan, incentivize workers to remain loyal, and prevent themselves from failing nondiscrimination tests.

If you haven’t done so already, find out what formula your employer uses for matching and increase your funds to reach the maximum. The average 401(k) match can be worth 4.3% of a person’s pay. A common match is dollar-for-dollar on the first 3% and 50-cents-on-the-dollar for the next 2%. The money your employer puts in is literally free money – free money that compounds over time – so you don’t want to leave any of it lying on the table.

Remember that, unless you have a Roth 401(k), the money you put into your account isn’t taxed until you pull it out in retirement, so you’re lowering your tax obligations AND growing your savings account at the same time by meeting the full employer match.

4. Take an early distribution rather than a loan.

The best course of action is to leave your money where it is, rather than tapping it for emergency cash. However, if you’re really in a rut and have no 0% APR credit card access, home equity to borrow, or low-interest-rate loans to consider, then you have the last resort of taking an early 401(k) distribution or loan. Normally the loan would be the better deal, given that you can avoid paying the IRS penalty, but 2020 comes with new rules that make early distributions more favorable.

Typically, folks under age 59.5 would be subject to a 10% IRS penalty, on top of losing the compounding interest on the money taken out of the account. However, as part of the CARES Act, investors are able to take up to 100% of the money put in (to a maximum of $100,000) as a distribution — without paying the 10% penalty. You’ll still owe income taxes on the distribution, but you have up to three years from now to pay them. Money can be redeposited into the account as a rollover contribution at any time within three years.

Not all employers allow the new rules, so be sure to check with the plan administrator to find out if this is an option for you.

Up to 100% or $100,000 can be taken out of a 401(k) as a loan in 2020 as well, but the repayment period is only delayed by one year (December 31, 2021). So, if you were to take out a five-year loan of $100,000 at typical loan rates, you’d be paying about $1,800 per month. Worse yet, defaulting on the loan would lead to full taxation due on that $100,000, PLUS the 10% early withdrawal penalty in the year of default.

Whether you’re a business owner or employee, you can always contact Ubiquity, your 401(k) plan administrator, to discuss what 401(k) small business options exist, given your unique situation.

One of the great advantages of a self-directed Solo 401(k) is the wide range of investment options it offers solo business owners. With a self-directed solo 401(k), you have the freedom to decide how to invest your pre-tax retirement contributions. Owner-only businesses and spouses can open a Solo 401(k), whether they are incorporated or unincorporated, a sole proprietorship, partnership, or corporation.

Whereas traditional 401(k) plans limit your investment options to pre-approved funds, self-directed 401(k) plans allow you to choose exactly where you’ll invest your money.

Solo 401(k) Investment Possibilities

With a traditional 401(k) plan, you are limited to investments in annuities, mutual funds, and publicly traded stocks. Choose a Solo 401(k) for broader options on where you invest your money.

Solo 401(k) investment options include:

  • Accounts receivable
  • Bonds
  • Certificates of deposit
  • Coins and Bitcoin
  • Commercial real estate
  • Crowdfunding
  • Deeds
  • Developed land
  • Domestic real estate
  • Energy investments
  • Equipment leasing
  • Foreclosure property
  • Foreign currencies
  • Foreign real estate
  • House flips
  • Life insurance
  • Limited Liability partnerships
  • Mortgage
  • Mortgage pools
  • Mutual funds
  • Precious metals
  • Private equity loans
  • Private placements
  • Raw land
  • Residential real estate
  • Secured or unsecured promissory notes
  • Stocks
  • Structured settlements
  • Tax liens and deeds

Should You Use Solo 401(k) Funds to Invest in Real Estate?

The IRS permits using a Solo 401(k) to purchase real estate or land. As a trustee of the 401(k) plan, investing in real estate is as simple as writing a check from your 401(k) plan bank account. The benefit of buying real estate with your Solo 401(k) plan is that all gains are tax-deferred until a distribution is taken. You can wait until age 70.5 to take the required distribution. In the case of Roth Solo 401(k)s, all gains are tax-free.

For instance, if you were to buy a property using personal funds, you’d be subject to federal and state income tax. On the other hand, you could feasibly buy $100,000 in property, later sell for $300,000, and enjoy the $200,000 of gain appreciation tax-deferred.

How Is a Solo 401(k) Different Than an Individual 401(k)?

There’s no difference! They’re just different names for the same thing.

How a Solo 401(k) Works

  • You can open a Solo 401(k) if you are a business owner or self-employed person with no employees.
  • As an employee (of yourself), you can contribute up to $19,500 (plus $6,000 as a 50+ catchup).
  • If you earn less than that, you can put up to 100% of your earned income into the fund.
  • As an employer (of yourself), you can contribute up to 25% of your first $285,000 in compensation.
  • You may contribute up to the Solo 401(k) limits for 2020. (See the next section for details!)
  • To get started, you’ll need to contact an online plan administrator like Ubiquity. Setup is quick and easy.
  • You will need to file paperwork with the IRS every year once you have over $250,000 in your account.

Solo 401(k) Limits for 2020

Like the Individual 401(k), the Solo 401(k) plan allows a maximum savings potential of $57,000 for those under 50 and $63,500 for those over 50. If you have a spouse and file joint, you may double this amount! With either plan, you can choose whether to pay taxes now (Roth) or later (Traditional). You can vary contributions and investments as you see fit, depending on how successful the business is doing in a given year.

Are You Eligible for a Solo 401(k)?

Take advantage of the widest range of investment possibilities if:

  • You are self-employed, a sole proprietor, an independent contractor, a consultant, or in a partnership.
  • You can generate income through an LLC, C-Corp, S-Corp, Limited Partnership, or Sole Proprietorship.
  • You’ll just need to have an Employer Identification Number.
  • If your spouse earns income from your business, you can combine assets in the plan.
  • You have no W2 employees, but a few employees under age 21 or working PT (less than 1,000 hours).
  • There are no “earned income” requirements, and you do not have to contribute to the plan every year.

If you have any additional questions about setting up a Self-Directed Solo 401(k), check out our 401(k) resources page and contact us when you’re ready to take the next step. As one of the leading Solo 401(k) providers, we handle all the administrative and maintenance work for one low monthly flat-fee. You are free to work with the investment broker of your choice. The deadline for establishing a new Solo 401(k) is December 31.

Contact your plan sponsor right away if you think you have contributed too much to your 401(k) — or you’ll be taxed twice (in the year you contributed, and in the year you withdrew)! If you’re under 59.5 years old, your distributions could also be subject to the 10% early distribution tax and 20% withholding.

Can you contribute too much to a 401(k)?

The IRS limits the amount you can put into a tax-advantaged 401(k) account. For 2020, that amount is $19,500 for individuals under 50 and $26,000 for those over 50. The employer contributions do not count toward that limit but instead count toward an overall limit of 100% of your salary or $57,000 – whichever is less.

Most plan participants never have to worry about overcontributing. The plan administrator tasked with account maintenance will likely keep you from putting too much money into the account each year.

However, you might run into a problem of overcontributing if:

  • You switch jobs during the year and start a new 401(k) plan.
  • You work multiple jobs with more than one 401(k).
  • You received a pay raise or bonus, which included automatic 401(k) deductions.

Cut through the complexity of choosing and customizing the right 401(k) for your small business. Get an instant quote.

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How to avoid a 401(k) overcontribution

Juggling multiple 401(k)s is challenging. Communicating with your employers and plan administrators to stay on top of the issue is the best way to stay on top of the situation before it ends up costing you big-time.

How to fix a 401(k) overcontribution

The IRS allows until April 15 of the following year to correct an overcontribution error. They recommend contacting your plan administrator to fix the problem by paying out the difference as an “excess deferral.” The plan administrator will pay you that amount by April 15, which counts as part of your gross income for the year in which it was contributed. The interest earned on the amount is taxed when the money is withdrawn.

Ideally, you will check your distributions in January or February and initiate any withdrawals by March 1, so you’re not left scrambling after the deadline. Should you notice the error after April 15, the excess contribution will be taxed twice – tax on the excess the year it was contributed to the 401(k) and tax on whatever amount is withdrawn from the retirement account.

How to contribute more toward your retirement

If you’re looking to maximize your retirement savings, you are allowed to have multiple accounts. If you reach the contribution limits of your 401(k), for example, you can open a high-deductible health spending account, as well as a tax-deductible or Roth IRA.

Contact Ubiquity

As a small business 401(k) plan provider, Ubiquity is responsive to the needs of employers and employees, including concerns about juggling multiple 401(k) plans or overcontributing. We provide employees with financial wellness tools through the Edukate platform to help you reach your goals.

Considering a 401(k) withdrawal? Here’s how much you can get if you choose to cash out your 401(k):

  • Traditional 401(k) (age 59.5+): You’ll get 100% of the balance, minus state and federal taxes.
  • Roth 401(k) (age 59.5+): You’ll get 100% of your balance, without taxation.
  • Cashing out before age 59.5: You will be subject to a 10% penalty on top of any taxes owed.

Cashing out early will also result in lost growth. Therefore, it’s recommended that you let your money sit as long as possible to reap the full reward of your retirement savings. Of course, in some scenarios, it’s easier said than done to let the cash sit.

How Much Will I Lose Cashing Out My 401(k) Early?

Consider this concrete example. Let’s say your plan allows early distributions, so you decide to take $10,000 out of your 401(k). You’re taxed at a federal rate of 22% and a state rate of 8%, so you’ll end up paying $2,500 in federal tax and withholding, plus $800 to the state. That means that you will be paying a hefty $4,300 from your retirement savings to receive $5,700.

Worse yet, assuming the average 8% year-over-year returns, leaving that $10,000 in the account could make you $68,485 over the next 25 years.

Cut through the complexity of choosing and customizing the right 401(k) for your small business. Get an instant quote.

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Should You Cash Out a 401(k) When Leaving a Job?

One option after you have left your employer is to have the plan administrator cut you a check for the full amount you’ve invested in the 401(k) plan. However, the check balance will only be for 70% of your 401(k) balance — with 20% deducted for taxes and 10% deducted as a penalty.

For most, a better alternative would be to roll the 401(k) over into a new employer’s 401(k), OR (if you don’t have a new employer yet) into a Solo 401(k) or IRA.

Arranging a custodian-to-custodian transfer within 60 days of leaving your job will not trigger a taxation event or a penalty. That way, your money can continue to grow and earn interest, and you can elect to take your regular distributions in retirement as originally planned.

Should You Take a 401(k) Loan or 401(k) Withdrawal?

Some plans allow loans from 401(k) plans as an option to get access to the fund for virtually any purpose. Maybe you want to travel, pay your child’s college tuition, put a down-payment on a new house, or cover the cost of a divorce. There are many personal reasons to consider a loan.

Generally, you can take up to 50% of the balance to a maximum of $50,000. The good news is that there is no age restriction, and there are no taxes due when you take out a loan. However, the loan must be repaid over a five-year period, with interest owed back to your account.

There is risk involved in taking out a loan. Some plans allow you to roll over a 401(k) (and loan balance) when changing employers. However, in other cases, you may have to pay your outstanding loan balance in full within 60 days of leaving an employer; otherwise, it will be considered a 401(k) withdrawal, taxed as ordinary income and subject to the 10% withdrawal penalty.

Compared to a loan, an early 401(k) withdrawal:

  • Must have an option that allows for in-service withdrawals, which may be restricted by age or hardship.
  • Will be taxed as ordinary income (while loans are generally not taxed).
  • Can be subject to a 10% penalty if you’re under 59.5 (whereas there is no restriction with loans).
  • Will not require repayment (as you would a 401(k) loan).

Are there any exceptions for getting 401(k) cash early without penalty?

You can cash out a 401(k) before age 59.5 without paying the 10 percent penalty if:

  • You become completely and permanently disabled.
  • You incur medical expenses that exceed 7.5% of your gross adjustable income.
  • You are court-ordered to give funds to a former spouse or dependent.

In some cases, 401(k) cash with the 10 percent penalty is the best option. The purchase of a primary residence, higher education tuition, preventing eviction, out-of-pocket medical expenses, or a severe financial hardship can cause you to need the funds sooner rather than later.

The case for NOT cashing out a 401(k) early

Keep in mind compound interest only works if you leave the money sitting. When you cash your retirement checks early, you’re not only subtracting that sum from your future retirement, but you’re also negating potential interest accrued over the years and losing almost 30 percent of your balance to taxes and fees.

It may be tempting to view your 401(k) as your own personal bank account, but it can be so much more if you have the willpower to let your money work harder for you.

Are you considering taking money out of your 401(k)? Try our 401(k) calculator to see if this option is right for you.

In 2020, the total annual contribution maximum, including 401(k) employer matching, is $57,000–or up to 100% of the employee’s salary if they make less than that. Individuals may contribute up to a maximum of $19,500 to their 401(k)s or $26,000 if they’re 50+ years old. Employer contributions are added ON TOP of this limit to a maximum of $57,000.

How Much Should I Contribute to My 401(k) With Employer Matching?

Of course, how much you can contribute to a 401(k) and how much you should contribute can be two different calculations. First, you’ll want to find out what your employer match is to be sure you’re maximizing your savings. Then you may need to crunch a few more numbers to determine how much you should put into your retirement account without overburdening yourself now.

What Is Your Employer Match?

The exact match amount varies from employer to employer, so you will need to ask human resources or your boss about the plan details to be sure your contributions meet the level of the maximum employer match.

Generally speaking, the average matching contribution is 4.3% of an employee’s pay. Nearly three-quarters of employers prefer to match 50 cents on the dollar, up to 6% of employee pay. About one-quarter of employers elect to match dollar-to-dollar, up to a maximum of 3% employee pay.

You want to be sure you’re contributing at least enough to earn all of the matching dollars your employer offers. After all, this is FREE money.

When Should You Max Out Your 401(k)?

Personal financial experts recommend saving at least 15% of your annual income for retirement. If you’re making at least $130,000 in 2020, 15% will bring you to the maximum $19,500 contribution for high earners. If you can afford to save the maximum, you should take advantage of employer matching, tax savings, and compounding interest to build a robust retirement portfolio this way.

When Shouldn’t You Max Out Your 401(k)?

On the other hand, if you’re earning $50,000 a year, you probably can’t afford to set aside 39% of your total income. Certain financial priorities should come before maxing out a 401(k), such as:

  • Saving three to six months of basic living expenses in an emergency fund
  • Eliminating high-interest credit card debts and personal loans
  • Being able to save for short-term goals like having a child, buying a home, or buying a car
  • Covering yourself with adequate life insurance
  • Contributing the maximum to your Health Savings Account

Is Your Plan Working For You?

If your work retirement plan is burdened by high fees and lackluster investment lineup, it may not be worth hitting the maximum contribution. Read over a copy of your summary plan description and annual report before considering your next move. Other tax-advantaged retirement options like Traditional or Roth IRAs may let you contribute up to $6,000 or $7,000 a year with more control over your investment options.

If you’re an employer looking out for your workers, you can always contact Ubiquity to discuss starting a new plan or switching plan providers to take advantage of our administrative services without paying AUM fees, per-participant fees, or other unnecessary costs.

You can make withdrawals from a 401(k) without IRS penalty under several circumstances:

  • You’re age 59 ½

  • You’re rolling over your funds

  • You’ve experienced a hardship

You’re age 59 ½.

The IRS encourages long-term saving and growth by levying a 10% early withdrawal penalty on money taken out of 401(k) accounts prior to participants reaching 59 ½ years of age. However, once you reach that magic number, you can feel free to take withdrawals to cover living expenses and other financial needs.

Keep in mind that you’ll need to pay taxes on the money as you take it out (unless you have a Roth 401(k)), and any money left in will continue to earn tax-deferred or tax-free growth.

You’re rolling over funds.

If you leave, quit, or get fired from the company at age 55 or older, you can cash out that account in a lump sum withdrawal without incurring a penalty.

If you’re under 55 years of age (or if you prefer), you have up to 60 days to rollover your funds to a new 401(k) or IRA without triggering a taxable event. The best way to accomplish the rollover is to transfer the money directly from the old custodian to the new custodian to avoid having 20% automatically withheld for income tax.

If you fail to put the entire amount into a new retirement account within two months, it will be considered a distribution that is not only taxed but penalized if you’re under 59 ½.

You’ve experienced a hardship.

Penalty-free withdrawals are allowed for certain hardships, such as:

  • Medical debt that exceeds 7.5% of your Adjusted Gross Income (or 10% if you’re under 65).
  • Suffering a permanent disability.
  • Court-ordered withdrawal to pay a former spouse or dependent.
  • Being called to active duty military service.

Some 401(k) plans allow savers early access to funds to buy a primary residence, pay for educational expenses, cover funeral costs, make necessary home repairs, or prevent foreclosure – but a penalty must be paid. Each plan is different, so it’s important to ask before taking the money out.

Once you take a hardship withdrawal, you’re generally barred from contributing to the 401(k) for at least six months. You will also be limited to the principal funds you’ve contributed, and you will still have to pay taxes on traditional 401(k) funds.

You agree to substantially equal periodic payments.

Some people choose to retire early once they reach 50. By agreeing to substantially equal periodic payments under Internal Revenue Code Section 72(t), you can withdraw money from your 401(k) once a year for a minimum of five years or until you reach age 59.5 – whichever period is longer.

You may use one of three methods to calculate your payments:

  • RMD Method

    Use IRS life expectancy tables to figure out your life expectancy and divide your account balance by the number of years. This is the easiest method but yields the smallest distribution.

  • Fixed Amortization Method

    Draw down your account value over the course of your life expectancy after applying an IRS-approved interest rate to your account balance.

  • Fixed Annuitization Method

    Use an annuity factor from the IRS mortality table combined with the IRS-approved interest rate.

Contact Ubiquity to inquire about 401(k) plans or if you have questions about making a 401(k) withdrawal.

Generally speaking, single-file individuals may contribute up to $19,500 to a 401(k) in 2020. Joint filers can contribute up to $19,500. An additional $6,500 is allowed in catchup contributions for 2020 for those 50 and over.

Employers may contribute up to $37,500 extra in matching contributions to a grand total of $57,000.

If you are considered a “highly compensated employee,” you may not have the same 401(k) contribution limits as your fellow employees. Nevertheless, there are ways to work around IRS restrictions and maximize your retirement savings.

How much can high earners contribute to a 401(k) in 2020?

By American standards, a “high earner” household brings in $100,000 to $350,000. If you fall into the low end of this category but earn less than $130,000, each adult filing separately in your household can contribute $19,500 into a 401(k), plus receive employer matching contributions.

If you are self-employed or an entrepreneur, you may contribute as both employee and employer to a maximum of $57,000. If you are over age 50, you can set aside an additional $6,500 in catch-up contributions.

Are you a highly compensated employee?

Different rules apply if the IRS defines you as a “highly compensated employee.” An HCE is someone who meets one or more of the following criteria:

  • Received $130,000 or more in compensation from a 401(k)-sponsoring employer – “Compensation” covers paycheck income, overtime, bonuses, commissions, and salary deferrals made toward 401(k)s.
  • Owns more than 5% of the interest in the business sponsoring his or her 401(k) plan – The ownership of company shares includes that of you, your spouse, children, and grandchildren working for the firm. So, if your holdings are 3%, and your child owns 3%, you are both considered “highly compensated employees.”
  • Has been designated by the employer as a top earner for non-discrimination testing purposes – Employers may also choose to designate you as a “highly compensated employee” if you rank among the top 20% of employees paid.

For your employer to pass non-discrimination tests, average contributions made by HCEs can’t be more than 2% higher than the average contributions made by non-highly compensated employees. If the average contribution made by non-HCEs equals 4% of their salaries, the average contribution HCEs make can’t exceed 6% of their salaries.

The total amount of HCE contributions cannot exceed 2% of the total amount of non-HCE contributions. So how much high earners are able to contribute depends on how much the average worker contributes or whether the average worker is participating at all.

What if you’ve maxed out your contributions?

Companies conduct non-discrimination testing by March 15. Highly compensated employees who have maxed out their contributions can expect a refund of the excess contributions. This refund counts as taxable income and will increase tax liability for the current year.

Other options for high earners to maximize retirement savings

That $6,000 in catch-up contributions for those over-50 has no earning limit, so HCEs can at least maximize there. HCEs can also contribute up to $3,550 into an individual health savings account or up to $7,100 for a family, plus $1,000 a year if you’re over 55.

Highly compensated employees are ineligible for a tax-deductible Traditional IRA — which phases out once modified adjusted gross income reaches $65,000 single-file or $104,000 joint-file in 2020; however, they can save $6,000 (under 50) or $7,000 (50+) in after-tax contributions to enjoy tax-free earnings and growth.

A non-deductible IRA may also be converted into a Roth IRA – a strategy known as the backdoor Roth IRA – which allows HCEs to avoid paying tax on the conversion.

Many companies offer a deferred compensation plan, which allows a percentage of salary and taxes to be deferred to retirement. Many HCEs also put money into a low-cost deferred variable annuity, which functions like a non-deductible IRA without the contribution limits.

Spouses of HCEs can also max out their 401(k) contributions if they are not designated HCEs.

Contact Ubiquity to learn more about maxing out 401(k) contributions.


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San Francisco, CA 94104
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© 2021 Ubiquity Retirement + Savings
Privacy Policy
44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

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