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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

What is the CalSavers June 2022 Deadline?

Siân Killingsworth / 19 Apr 2022 / 401(k) Resources

deadline calendar

Soon nearly all employers in California will need to offer a retirement plan or default to the state-run program. The CalSavers deadline is fast approaching on June 30, 2022—meaning all businesses with five or more California employees aged 18 or older must comply or face penalties.

Employees can opt out of the program at any time, but eligible employers cannot withdraw unless they are establishing their own qualified retirement plan. Now is a good time to explore alternatives like 401(k) retirement plans for your small business in California.

Who Must Register Employees for the CalSavers Program?

Your business will need to register for the CalSavers program by June 30, 2022, if:

  • You have five or more California-based employees over age 18
  • You do not offer your own company pension or 401(k) retirement plan

You will need to visit the CalSavers website to either register for the state-sponsored IRA program or file an exemption if you are offering a private-market alternative like a 401(k). If you are participating in CalSavers, you’ll have up to 30 days after registration to add employees to the roster. Some light ongoing maintenance may be required.

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What Were the Previous CalSavers Retirement Plan Deadlines?

The CalSavers retirement plan has been a couple years in the making:

  • September 30, 2020, was the first deadline for companies with over 100 employees
  • June 30, 2021, was the second deadline for companies with 51 to 100 employees
  • June 30, 2022, is the third deadline for companies with five to 50 employees

What Happens If Companies Miss the CalSavers Deadline?

Close to 400 companies in the first wave missed the 2020 deadline. The state began penalizing these companies as of January 2022.

The Franchise Tax Board will assess a penalty of $250 per eligible worker on companies with more than 100 employees. The penalty will triple for companies that fail to comply within 90 days.

Businesses Don’t Have to Wait Until June to Get Started with a Retirement Savings Plan

Many businesses are foregoing the CalSavers program, instead taking this opportunity to offer their workers a company-sponsored 401(k) retirement plan that they own and control. After all, the CalSavers account doesn’t serve as an incentive for employee retention, as it transfers in the event of a job change.

How Does CalSavers Work?

Employees receive 30-day notice of auto-enrollment, at which point they can accept or change the standard deduction or opt out of the plan entirely. CalSavers Roth IRAs auto-enroll starting at 5% the first year, increasing 1% annually until reaching 8% in the fourth year, though workers can adjust the number up or down.

The maximum contribution is $6,000 for workers under 50 or $7,000 for workers over 50. Investments are made into a simple target date fund with 0.825% to 0.95% AUM fees. Employees pay tax on the money up front, but do not owe taxes when the money is withdrawn in retirement.

Why Isn’t There a CalSavers 401(k)?

Even though 401(k)s are popular retirement savings vehicles, the government cannot order private enterprises to offer a CalSavers 401(k), as per the federal Employee Retirement Income Security Act of 1974 (ERISA). CalSavers IRAs were challenged as a violation of ERISA, but the 9th Circuit Court of Appeals ruled in May 2021 that CalSavers was a “state-run program,” not a mandatory employer-provided benefit.

Why Choose a 401(k) Plan Instead of CalSavers?

A privately sponsored 401(k) plan allows workers younger than 50 the ability to save up to $20,500 in 2022. If you’re age 50 or older, you can sock away an extra $6,500. While not every worker will be able to hit the maximum contribution limit, business owners and top executives can maximize their retirement assets this way.

Since the government requires annual top heavy and nondiscrimination testing, employers may elect to make matching or non-elective contributions to employee accounts as a benefit to workers that satisfies fairness requirements.

It’s a common misconception that 401(k)s are too costly for small enterprises. Ubiquity is a plan administrator focusing exclusively on affordable, easy-to-manage small business 401(k)s.

Contact us for details on how you can set up a new program for one low monthly flat fee.

If you are considered a Highly Compensated Employee (HCE) in 2022, your maximum 401(k) contribution is the same as anyone else’s–$20,500 plus an additional $6,500 in catch up contributions if you’re age 50 or older. Employers can contribute an extra $40,500 if the plan allows it.

However, employers will also need to consider annual nondiscrimination testing requirements for a fair and balanced plan, so they may not be able to contribute this maximum to highly compensated employees in the top 20% who make $135,000 or more.

What is a Highly Compensated Employee in 2022?

A Highly Compensated Employee in 2022:

  • Owns more than 5% of the company at any time during 2021 or 2022
  • Earns over $135,000 in 2022
  • Falls in the top 20% of employees by compensation (if the employer makes a top-paid election)
  • Earns “compensation” that includes paycheck income, overtime, bonuses, commissions, and any 401(k) salary deferrals

Examples of Highly Compensated Employees in 2022

The rules can be confusing because they depend on how the plan is drawn up. Here’s an example to consider.

In a ten-person small business:

  • CEO Mary earns $500,000 and owns 90% of the company: HCE
  • Brett earns $350,000 and no ownership: HCE
  • George earns $200,000 and no ownership: HCE unless the company makes a top-paid election
  • Jane earns $70,000 and owns 10% of the company: HCE
  • Six other employees earning $40,000 or less: Not HCEs

Most of the time the rules are obvious, but some employees’ status is harder to determine. It depends on whether the employer elects for the top-paid rule to apply in order to pass their nondiscrimination assessment by reducing the number of individuals in the highly compensated group.

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What’s Changed with 401(k) Plans from 2021-2022?

In many ways, 401(k) plans have changed since last year:

  • The maximum employee contribution limit increased $1,000
  • The maximum employer contribution limit increased $3,000
  • The employee limit for calculating contributions increased $15,000
  • The key employees’ compensation threshold for top-heavy testing increased $15,000
  • The highly compensated employees’ threshold for nondiscrimination testing increased $5,000

There was no change to the catch up compensation amount.

How High Earners Impact a 401(k) Plan’s Compliance With ERISA

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law ensuring fair and equal opportunity access to company-sponsored retirement plans. Employers must pass annual nondiscrimination tests to show their plan benefits all employees—not just so-called “Highly Compensated Employees.”

Generally speaking, HCEs should contribute no more than 2% higher than the percentage Non-Highly Compensated Employees are contributing. So, if non-HCEs are putting in 5% of their combined salaries into the plan, the HCE group could contribute a maximum of 7% of their combined salaries.

What Can Employers Do to Save More in 2022?

Employers who personally want to save more in a small business retirement plan – and perhaps reward some of the top employees in their ranks – may consider adding a Safe Harbor provision and employer contributions to the retirement plan. By bringing up the combined total of the non-HCE group, HCEs will be able to contribute more to their plans.

What Can Employees Do to Save More in 2022?

Highly-Compensated Employees have other options to save for retirement aside from funding a 401(k) to the max. Individuals can put up to $3,650 into an individual Health Savings Account or $7,300 into a family HSA, plus an extra $1,000 if they’re age 50 or older.

High earners can also invest unlimited amounts into stocks, bonds, mutual funds, exchange-traded funds, and real estate investment trusts. Though they will have to pay capital gains taxes on the earnings and taxes on the money invested, the returns can certainly provide supplemental retirement income.

Contact Ubiquity to learn about different types of small business retirement plans so you can find one that best suits your needs. A small business 401(k) is affordable when you receive full administrative support for one low, affordable, transparent monthly fee that stays the same, even as your plan grows in participation or total balance.

 

 

2022 401k Catch Up Contribution Rules

Siân Killingsworth / 18 Apr 2022 / 401(k) Resources

If you’re turning 50 years old in 2022, you can put an additional $6,500 into a Solo 401(k) or small business 401(k) plan. Reaching this important retirement savings milestone not only saves you more than $1,000 on your tax bill, but earns you investment returns and compounding interest, all tax-shielded.

While the 401k catch up contribution in 2022 has not changed from 2021, maximum 401(k) contributions increased $1,000 to $20,500 this year. That means, including your catch up contribution, your 2022 401(k) savings limit will be $27,000.

Are 401(k) Catch Up Contributions Increasing in 2022?

The answer is NO — the 401k catch up contribution limits for 2022 will remain the same. Since 2020 through the present, $6,500 in catch up contributions are allowed.

What Is the Maximum 401k Catch Up Contribution for 2022?

You can begin making catch up contributions on January 1st the year you turn 50. The max 401(k) catch up contribution for 2022 is $6,500.

To take full advantage of your 401(k) savings vehicle and hit that $27,000 goal for 2022, you’ll need to reserve $519.23/week or $2,250/month. Even if you are not able to hit this target, saving at least enough to obtain your employer’s 401(k) match is an excellent start.

How Much Can You Save in a SIMPLE 401(k) With a Catch Up Contribution for 2022?

SIMPLE 401(k)s for small businesses with fewer than 100 employees can be easy to administer and are not subject to annual nondiscrimination testing, though employers must contribute and fully vest employees in the plan.

If you are 50 or older with one of these plans, you can save an extra $3,000 in catch up contributions – a figure that has remained the same since 2015. For 2022, the maximum limit for a SIMPLE 401(k) is $14,000 – meaning those aged 50 and older can save up to $17,000, including the catch up.

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Are Employer 401(k) Contributions Rising in 2022?

Most employers contribute to employee retirement savings. This allows business owners and key employees to contribute more to their own savings accounts, so it’s a win-win for everyone. On top of the $20,500 employees can potentially contribute to their accounts, employers can also put in an extra $40,500 for themselves, bringing the total to $61,000 in 2022. Of course, the exact amount depends upon the employer’s match formula or nonelective contribution rate. This ceiling increased by $3,000 from 2021.

For those age 50 or older making the additional $6,500 catch up contribution, the maximum combined employer/employee 401(k) contribution for 2022 is $67,500.

How Much Can Solo 401(k) Savers Put Away for Retirement?

When you’re age 50 or older with a Solo 401(k), you can contribute to the $67,500 2022 maximum as you are both employer and employee. Best of all, your spouse can also contribute to the plan, effectively doubling your tax savings for the year to a max of $135,000 if you’re both over 50. Of course, people under 50 still enjoy these tax advantages, too – just less the $6,500/person catch up contributions.

When Are Taxes Due on 2022 Retirement Savings?

Households can deduct their 401(k) contributions from their taxable income for 2022 and pay taxes upon 401(k) withdrawal in retirement. Currently, the 401(k) distribution rules do not require you to remove money from your account as Required Minimum Distributions until you are 72 years of age. While you can opt to withdraw money as early as age 55 in some cases, the longer your cash sits, the more profits and compounding interest you earn.

Do Roth 401(k)s Allow Catch Up Contributions?

YES, a Roth 401(k) allows you the same $6,500 catch up contribution. While you won’t get the immediate tax break that a Traditional 401(k) plan provides, you also don’t have to pay tax on the investment growth of that extra $6,500/year.

You’re free to withdraw this money — without tax or penalty — once you are 59 ½ years old and you’ve been contributing to the account for at least five years. Qualified withdrawals can also be taken if you become disabled or you pass away and leave the money to beneficiaries.

What Types of Retirement Accounts Allow Catch-Up Contributions?

In addition to 401(k) accounts, you may also contribute catch up amounts to:

  • 403b
  • Governmental 457b
  • Roth IRAs
  • SARSEP
  • SIMPLE IRAs

Should You Make the 401(k) Catch-Up Contribution in 2022?

Setting aside $6,500 today doesn’t equate to $6,500 retirement. By the time you need the money, it will be worth so much more. Even if you haven’t saved aggressively up to this point, the catch up contribution is designed to help get you where you need to be in a relatively short period of time. Here’s how a 401(k) catch up scenario might work.

  • You and your spouse earn $130,000/year, which puts your household in the 22% tax bracket. You each save the standard $20,500 plus $6,500 in catch up contributions. Ordinarily, you’d owe $28,600 in taxes
  • If you save the maximum for your 401(k)s, you’ll be paying taxes on $76,000 worth of income – bringing you down to the 12% tax bracket and decreasing your tax burden to $9,120 (-$19,480)
  • The catch up contributions alone produce a $1,430 tax discount
  • You can also put away up to $14,000 into a Roth IRA at a 12% rate, paying just $1,680 in taxes
  • All told, you can save $1 million by full retirement age this way

Had you opted out of the catch up contributions, you could have amassed over $50,000 in lost savings once investment returns are factored in. The impact is even more significant at higher tax brackets.

So, the answer to “Is the catch up contribution worth it?” is a resounding YES!

How Can You Set Up a 401(k) and Start Making Catch-Up Contributions?

Thanks to catch up contributions, it’s never too late to start saving for your future. If you want to set up a new solo or small business 401(k) account to enjoy all the benefits of tax-advantaged savings — including catch up contributions — the 401(k) contribution deadlines generally go as late as December 31st, 2022, with contributions allowed until next year’s tax deadline.

Contact Ubiquity to learn more about plan setup and administration for a flat transparent monthly rate with no AUM or per-person fees.

 

How to Recession-Proof Your 401(k)

Dylan Telerski / 27 Mar 2022 / 401(k) Resources

Manage your retirement plan through market volatility

Panic is palpable during a recession. Watching the daily dip in the Dow can be a painful experience for people who are accustomed to checking their stock portfolios daily.

Retirement savers may have heard that they can take out a 401(k) loan to help them through the crisis. Whether you’re actively involved with your plan or not, any market downturn presents a good opportunity to reassess and potentially recession-proof your 401(k).

Focus on what you can control.

What we know from decades of watching the markets through good times and bad is that a long-term focus with regular contributions is the best strategy to grow a retirement nest egg. Resist the urge to make a hasty, knee-jerk reaction and pull your money out. Stick to your plan to reach your investment goals. It WILL get better!

Make minor changes to benefit your situation.

What if you can’t rely on the long-haul, and you plan to retire within a few years? If you need short-term finances, you can sell some of your investments now, but remember that prices are low. You may end up taking a loss on the sale versus the price you originally paid for the stock. However, if retirement is still five or more years into the future, you can hold off and expect more normal annual returns when the market resumes its course again.

Take a closer look at asset allocation. Market timing rarely works, but you should at least make sure your portfolio consists of diversified mutual funds, as well as a mix of stocks and bonds. Consider target-date funds if you are older, as the fund manager will move your assets from riskier stocks to less-risky bonds and money market funds as you get closer to retirement.

Even if you’re a younger investor, you can review the assets you currently own and rebalance. If your portfolio is skewed heavily toward stocks, consider adding some bonds. If you have invested too heavily in the market, shifting to cash temporarily can be a protective measure if market volatility is wild.

Assess the risk on your individual securities. Look for mutual funds with “growth and income” or “balanced” in the name.

Most importantly, discuss your situation with your financial advisor. They know your portfolio and the market, so are better able to assess your chances of success or failure when taking your investments into your own hands.

Look for opportunity.

Where some see a market wipe-out, others see opportunity. Many investors are actually increasing their contributions during the recession. Elective salary deferrals stretch further when stock prices drop.

If you can afford to, contact your plan administrator to adjust the withholding percentage. This money will come out of your paycheck seamlessly and go directly into your retirement savings. This strategy makes sense especially if you have failed to maximize your employer match; this is free money that will continue to grow for you over the long haul.

As of 2022, contribution limits have increased to $20,500, with an additional $6,500 allowed for those age 50 and older. This may be an opportunity to buy key stocks at relatively low prices to set yourself up for bigger future returns.

Recessions are common to the American economy, cycling every four years and lasting 10 months on average, but stock prices hit new highs after rebounding from each downturn. Hang in there, stay the course, and keep investing. Sticking to your plan is always safe, but don’t pass up an opportunity when it knocks. You may be able to make small, thoughtful adjustments that can optimize your returns. Contact Ubiquity to learn more about how to maximize 401(k) plans during the pandemic.

What Is the 401(k) Limit for 2022?

Siân Killingsworth / 8 Mar 2022 / 401(k) Resources

retirement saver reviewing contribution limits

The individual 401(k) limit increases by $1,000 to $20,500 in 2022. Catch up contributions remain the same at $6,500, meaning that you can contribute a total of $27,000 if you’re age 50 or older. The combined total annual 401(k) contribution for employers and employees (or self-employed business owners) increased this year by $3,000 to $61,000 for people under age 50, or $67,500 for people age 50 or older.

Why invest in a 401(k) in 2022?

One of the best features of saving for retirement using a 401(k) account is the tax-deferred contribution. Saving some of your wages before you pay income tax on them this year will reduce the total amount of money you owe Uncle Sam. You will likely also benefit from the growth in interest on those savings, year-over-year.

Why does the 401(k) limit change?

Every autumn, the Internal Revenue Service announces the maximum 401(k) contribution limits for the coming year. Sometimes the amount stays the same but in other years it may increase by $500 or $1,000 to adjust for inflation and changes to the cost of living. With the COVID-19 pandemic still in full swing and a relatively high 5.9% annual inflation rate, it’s not surprising that adjustments have been made to the 401(k) allowance for 2022.

What are catch up contributions?

Many Americans don’t have much saved for retirement, and relying on Social Security will be insufficient for most people’s needs. You may realize you haven’t saved as much money as you’d like or you may wish to retire early. The IRS allows you to put in $6,500 extra into your account each year once you reach the age of 50. This way, you can catch up on contributions you missed in previous years to help you retire more comfortably.

What is the combined employer/employee 401(k) limit in 2022?

The $20,500 contribution limit in 2022 applies to employee contributions only. Most employer plans match some or all employee contributions based on a certain formula. The employer match is free money given to reward those who participate in the plan. Employers choose to contribute to their employee match plans because when more rank-and-file employees participate in the retirement plan, the more business owners, key employees, and highly-compensated employees (HCEs) are permitted to contribute to their own plans.

Based on the rules of IRS nondiscrimination testing, when enough non-HCE employees are plan participants and their contributions are company matched, the total employee/employer limit for 2022 is $61,000 for those under age 50 and $67,500 for those age 50 and older.

How much can you put in a Solo 401(k) in 2022?

The combined employer/employee totals are also relevant to self-employed freelancers, business owners, or solopreneurs who contribute to a Solo 401(k) plan as both employer and employee. In 2022, individuals putting money into a Solo 401(k) may contribute up to the employer/employee maximum of $61,000 (under 50) or $67,500 (age 50 and older).

Spouses may also participate in Solo 401(k)s, allowing married couples a household savings of up to $122,000 (under age 50) or $135,000 (age 50 and older). Plan participants who have reached their maximum contribution limit may consider adding a cash balance plan to double, or even triple, their tax savings.

What is the SIMPLE plan contribution limit in 2022?

SIMPLE 401(k) plans are designed for companies with fewer than 100 employees. The 2022 elective deferral limit is 100% of compensation, or $14,500, a $5,000 increase from 2021. Employees age 50 or older may also make the $6,500 catch up contribution on top of this limit.

Should you max out a 401(k) in 2022?

Not everyone can afford to set aside $20,500 or $61,000 in savings this year. If you are able to take advantage of the 401(k) maximum, the rewards can be great.

For example, imagine you are earning $210,000 and contribute the maximum of $20,500. You will only be taxed on $189,500 of your income, which can take you from the 35% tax bracket down to a 32% tax bracket. Instead of owing the IRS $73,500 in taxes, you will only need to pay $60,640 – a savings of $12,700.

Money contributed to the 401(k) plan compounds with tax-deferred gains, so that $12,700 saved can accrue to quite a large sum over the years.

At minimum, financial advisors recommend reserving 15 percent of your income for retirement or at least contributing enough to qualify for an employer’s match. Depending on your employer’s plan, this could be anywhere from 3% to 6% of your salary.

Contact Ubiquity to learn more about setting up a simple, affordable 401(k) plan for your small business or solo endeavor. We offer all the resources you need to get started and provide administration services for a low, monthly flat fee. You are free to work with your broker of choice to choose investments or we can help you find one through our affiliate network.

It’s not too late to start saving for the upcoming year, as the 2022 401(k) contribution deadlines aren’t until well into 2023. Call us today to enjoy retirement freedom tomorrow.

Curious how much you can invest toward your retirement in 2022?

Download the Ubiquity Retirement + Savings 2022 Contribution Guide

The IRS has announced the 2022 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 for individual retirement accounts (IRAs) won’t increase from 2021 to 2022, there is good news for retirement savers who participate in a workplace employment plan like a 401(k).

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

2022 401(k) and 403(b) individual contribution limits (IRS 402(g) Limit)

Age 49 and under

$20,500

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 2022, this limit has increased from $58,000 to a new maximum of $61,000.

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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2022 Highly Compensated and Key Employee definitions and limits

Key Employee Officer Compensation

$200,000

Highly Compensated Employee

$135,000

Annual Compensation Limit

$305,000

2022 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

2022 Traditional IRA modified adjusted gross income limit for partial deductibility

Single

$68,000 – $78,000

Married – Filing joint returns

$109,000 – $129,000

Married – Filing separately

$0 – $10,000

Non-active participant spouse

$204,000 – $214,000

2022 Roth IRA modified adjusted gross income phase-out ranges

Single

$129,000 – $144,000

Married – Filing joint returns

$204,000 – $214,000

Married – Filing separately

$0 – $10,000

2022 Simple IRA contribution limits

Age 49 and under

$14,000

Age 50 and older

$16,500

2022 Health Savings Accounts (HSA) contribution limits

Individual (employer + employee)

$3,650

Family (employer + employee)

$7,300

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 2021-61.

If you’re a high earner in 2021, you’ll likely want to maximize the amount of money set aside for retirement. 401(k) plans are tremendous vehicles for producing wealth over time, though there are maximum limits established by the Internal Revenue Service to ensure the wealthiest Americans do not use their retirement plans to evade their tax obligations and to ensure employers are not setting up their plans simply to benefit the top corporate elite. The maximum 401(k) contribution changes from year to year. Get the latest numbers here!

2021 Maximum Contribution Limits for High Earners

There are general maximum 401(k) contribution limits that apply to both high and low earners:

  • Annual Employee Contribution (Under 50): $19,500
  • Annual Employee Contribution (50+): $26,000
  • Employer/Employee Maximum (Under 50): The lesser of 25% of the plans’ total eligible salary OR $58,000
  • Employer/Employee Maximum (50+): The lesser of 25% of the plans’ total eligible salary OR $64,500
  • Maximum Compensation for Employee: $290,000

The $290,000 maximum = 25% of a $232,000 salary + the maximum employer contribution of $58,000.

High Earners Impact a 401(k) Plan’s Compliance With ERISA

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that protects individuals by ensuring equal opportunity access to company-sponsored retirement plans. To remain compliant and pass annual nondiscrimination tests, so-called “Highly Compensated Employees” generally cannot contribute more than 2% above their salaries than non-Highly Compensated Employees. So, if the non-HCE group contributes 5% of their combined salary to the company retirement plan, the HCEs cannot contribute more than 7% of their combined salary.

What’s Changed Since 2020?

While the $19,500 individual limit and $6,500 catchup contribution remain the same, changes include:

  • The maximum employer/employee contribution rate increased by $1,000 from 2020 to 2021.
  • The maximum income threshold of $290,000 increased by $5,000 from 2020 to 2021.

There have been no changes to the IRS definition of a “highly compensated” or “key” employee.

Are You a High Earner in 2021?

The IRS defines a Highly Compensated Employee as someone who meets at least one of the following:

  • Owns more than 5% of the business sponsoring the plan at any point within the last year, or has a spouse, child, and grandparents working for the company who collectively own 5+% of the business.
  • Made more than $130,000 in compensation during 2020 (Highly Compensated Employee). Compensation includes paycheck income, overtime, bonuses, commissions, and 401(k) salary deferrals.
  • Ranks among the Top 20% of salaries paid out by the company.*

*This only applies if the Top Paid group is elected in the plan document, please see consult your specific plan’s details.

Example of How a Maximum 401(k) Contribution Limit Applies to a High Earner

Here’s how a 401(k) maximum limit might play out in the real world:

  • Age: Under 50
  • Your annual salary: $400,000
  • Employer’s Plan: 5% match
  • Individual Contribution: $19,500
  • Employer Match: $14,500 (5% of $290,000 maximum)

So, rather than receiving 5% of your salary – which would be $20,000 – the match is limited to the upper threshold of $290,000 set by the IRS in 2021. This amount may increase next year, or the year after, based on cost of living adjustments.

 

Are There Additional Ways to Save for Retirement?

In addition to funding your 401(k) to the max, you can also contribute up to $3,600 into an individual Health Savings Account (HSA) or $7,200 for a family HSA, plus $1,000 extra if you’re over 55.

High earners may also invest as much as they’d like in stocks, bonds, mutual funds, exchange-traded funds, and real estate investment trusts – though they will have to pay taxes on the money invested, as well as capital gains taxes on the earnings.

Contact Ubiquity Retirement + Savings to find out which of our affordable, hassle-free small businesses 401(k)s are right for you and your employees. You can count on a low, transparent monthly fee that stays the same, regardless of your plan balance or participation numbers.

You’re contributing to your workplace retirement account–that’s great! But how are you dealing with the taxes of the money you can contribute. There are two ways you put money into your 401(k) retirement plan– pretax or Roth.

Pretax contributions are the traditional form of 401(k). This means contributions come out of your paycheck before taxes, and are your distributions in retirement are taxed. This is useful if you’re earning more now than you plan to in retirement. Plus, you lower your taxable income in the present!

Think of the Roth 401(k) as the rebellious little sister of the pretax 401(k). Introduced in the early 2000s, it takes the tax treatment of a Roth IRA and applies it to your employer-sponsored plan. That means contributions come out of your paycheck before taxes, and distributions in retirement are tax-free. That means you don’t pay taxes on your investment growth!

Let’s look at the similarities (and differences) between the two retirement contribution types.

Traditional 401k vs Roth 2021 contribution limits

Traditional 401(k) plans are pretax savings accounts. This means your contributions are made before they've been taxed. Roth 401(k) plans are post-tax savings accounts. This means your contributions are made after they've been taxed.

If you contribute to a 401(k) plan at work, your employer can choose to match a percentage of your contribution. Any employer match will be taxable in retirement.

All About Withdrawals: In a traditional 401(k) distributions in retirement are taxed, just like ordinary income. In a Roth 401(k) there are no taxes on qualified distributions in retirement.

 

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Curious about different types of retirement accounts? Learn the difference between an Individual Retirement Account (IRA) and a 401(k).

If you’re a small business owner and need a 401(k) or Roth 401(k) plan for yourself and your company, only Ubiquity offers flat-fee plans plus free expert advice. We’ll fully customize your 401(k) to meet the specific needs of your small business.

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The individual 401(k) limit for 2021 is unchanged at $19,500. If you’re over 50, you can contribute a total of $26,000. The total combined employer/employee contribution is capped at $58,000.

Each year, the IRS announces whether it will raise the maximum allowable 401(k) contributions limit. Some years, the limit increases $500 or $1,000; other years, the limit stays the same. Attaining the maximum contribution shields 401(k) plan participants from having to pay federal taxes on the amount contributed, while building the best possible nest egg for retirement.

Has the 401(k) limit changed in 2021?

The main individual 401(k) contribution limit remained the same, but the combined employer/employee max increased $1,000. If you’re self-employed, you can save $58K.

Why does the 401(k) limit change?

Sometimes the IRS adjusts the maximum limit based on “cost of living increases.” From 2018 to 2019, they increased the individual limit $500 from $18,500 to $19,000, and the total employer/employee contributions from $55,000 to $56,000.

What are catch-up contributions?

Those over 50 are getting closer to retirement. Depending on how well you’ve saved and how your cost of living has fared over the years, you may wish to increase contributions to allow for a more comfortable retirement.

What is the combined employer/employee 401(k) limit in 2021?

Most employer plans match some or all employee contributions. The employer match represents free money on top of the $19,500 individual limit that employees can earn just by participating in the plan. The combined employer and employee contribution limit is $58,000 in 2021.

This figure also matters if you are a business owner, freelancer, or solopreneur with a Solo 401k, as you can contribute as both “employer” and “employee” to the 2021 maximum of $58,000. If you’re over 50, you can save $64,500. A spouse may also participate in this plan for a maximum household savings of $116,000 (if you’re under 50) or $129,000 (if you’re over 50).

Adding a cash balance plan can help you maximize tax and retirement savings further, possibly doubling or tripling the amount set aside for your future.

What can you contribute to a Solo 401(k) plan in 2021?

Freelancers, solopreneurs, and the self-employed can contribute to a Solo 401(k) plan as both employer and employee. The total contribution amount allowed in 2020 is $57,000, though individuals over 50 can contribute an additional $6,500. Those who qualify to make catch-up contributions can put up to $63,500 into a Solo 401(k) for 2020.

If you have already reached your maximum contribution limit, adding a cash balance plan can double or even triple your tax savings.

What is the SIMPLE plan contribution limit in 2021?

Companies with fewer than 100 employees are eligible for a SIMPLE retirement savings plan. This limit remains the same at 100% of compensation or $13,500 in 2021. Catchup contributions are allowed for employees over 50.

For SIMPLE plans, the elective deferral limit is 100% of compensation or $13,500 in 2020 and 2021. If the employee is age 50 or older, catch-up contributions may also be allowed.

What can you contribute to a 403b or 457 plan in 2021?

Contribution limits for 403b nonprofit and 457 government plans have stayed the same $19,500 in 2021.

How much can you contribute to IRAs in 2021?

Many retirement savers favor the 401(k) because it allows a higher contribution limit than IRAs. Contribution limits for Traditional and Roth IRAs remained unchanged at $6,000 for 2021. This marks the third consecutive year of no change. Prior to 2019, the $5,500 IRA contribution allowance remained consistent for six years. Those over 50 can put in an extra $1,000 to catchup. IRA eligibility can be limited by income range, marital status, and workplace plan availability.

Should you hit the maximum contribution limit?

Many Americans like to take advantage of 401(k) options because they reduce the taxable income for the year. So, if you are earning $210,000/year and put in the maximum $19,500, you will only be taxed on $190,500 worth of income, which takes you from the 35% to the 32% tax bracket. Instead of owing the IRS $73,500 in taxes, you will only pay $60,800. Any money contributed to the plan compounds, with all gains tax-deferred. You only pay tax once you start withdrawing the funds in retirement.

Not everyone can afford to save $19,500 each year, but financial advisers recommend setting aside 15 percent of your income for retirement – or, at the very least, saving enough to meet the maximum employer match. Plans vary, but employers often match 50% of your contributions up to 6% of your salary or 100% of your contributions up to 3% of your salary.

Contact Ubiquity to set up a simple, low-cost 401(k) for your small business and start saving today. We offer our clients ample resources and assistance with their plans, and our experts are ready to answer your questions about your 2021 retirement contribution limits, as well as the 401(k) contribution limit deadlines for 2020. Call today and discover for yourself what sets Ubiquity apart from the rest!

The pandemic has led to serious hardship for many Americans, including furlough, job loss, illness, and lost business income.

When facing unexpected financial challenges such as these, most advisors recommend cutting expenses, taking money out of emergency savings, tapping your brokerage account, or putting expenses on a 0% interest credit card rather than raiding your retirement nest egg. However, borrowing from your 401(k) may suddenly seem like a risk worth taking if these other options are not available to you.

December 30th, 2020, was the last opportunity to take advantage of eased CARES Act hardship withdrawal rules, but you may qualify for conventional relief in 2021. If you already took a withdrawal in 2020, you’ll need to know the payback rules to ensure you don’t rack up additional penalties.

Can You Take a 401(k) Hardship Withdrawal in 2021?

The IRS defines eligible 401(k) hardships as “immediate and heavy financial needs.” These needs generally include:

  • Medical care
  • Tuition
  • Emergency home repairs
  • Funeral costs
  • Eviction prevention

The purchase of a boat, investment property, or television would not be considered a heavy financial need. However, in 2020, the CARES Act created a provision that allows for a hardship withdrawal for people whose health or finances have been impacted by COVID-19.

Not all plans permit hardship withdrawals, so you will need to check with your 401(k) provider or sponsor to see if this opportunity exists for your particular plan. If it is permitted, you will have to demonstrate that you lack available funds to cover your expenses.

401(k) Hardship Withdrawal Rules 2021

If your plan allows for early distribution, the 401(k) hardship withdrawal rules for 2021 are as follows:

  • You can only withdraw what you need. If you’re seeking money to fix your house after a flood and receive an estimate for $10,000, that is how much you’ll be approved to borrow. You make take out additional funds to cover related costs like tax or replacement furnishings. The CARES Act set a COVID-19 withdrawal limit of 100% of the vested balance, to a maximum of $100,000. (Under normal circumstances, hardship withdrawals are limited to 50% of your balance or $50,000.) This maximum includes all amounts withdrawn from tax-advantaged savings accounts, so you can’t raid IRAs, 403bs, and multiple 401(k)s.
  • What you borrow may be subject to tax and penalties. Hardship withdrawals are typically subject to income tax and a 10% early withdrawal penalty (for those under age 59.5). The 10% penalty is waived for COVID-related hardship withdrawals, and you may spread out the tax payments on the amount borrowed over the course of three years.

Who Qualifies for COVID-related 401(k) Hardships in 2021?

The IRS allows withdrawals for COVID-related 401(k) hardships if:

  • You, your spouse, or a dependent are formally diagnosed by a CDC-approved test.
  • Your household suffers a financial setback from quarantine, furlough, a layoff, or reduced hours.
  • Lack of child care due to COVID-19 causes adverse financial consequences.
  • The business you own or operate had to reduce hours, limit capacity, or close because of the virus.

Is There a Deadline for COVID-19 Withdrawals?

The deadline for a 2020 tax year withdrawal was December 30th, 2020. The IRS is continually updating their rules along with this fluid situation, so it is possible they will formally announce some type of relief applicable to the 2021 tax year as the pandemic persists.

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Is There an Extended Deadline for Repaying Hardship Distributions?

If you took a hardship loan prior to the 2020 COVID-19 pandemic with repayment due between March 27 and December 31, 2020, the CARES Act allows you to delay this repayment by up to one year.

If you took a CARES Act distribution, you may repay all or part of the amount of a coronavirus-related distribution to an eligible retirement plan, within three years after the date that the distribution was received.

Managing the Tax Hit of a 401(k) Hardship Withdrawal

If you took money out in 2020, you are allowed the opportunity to repay the money back into your account over a three-year period to avoid paying income tax on the distribution. So, for instance, if you borrowed $9,000, you could repay $3,000 in 2020, 2021, and 2022. There is no rule stipulating you must space your repayments out evenly. If you’re still hurting at the end of 2020 and even through 2021, you may elect to repay the full $9,000 in late 2022.

If you cannot repay the amount borrowed from your 401(k) over the next three years, that money will be taxed as income – and you will be subject to the interest and penalties that have accrued since you took the money out. The lowest tax bracket is 10%, so that means you’d owe at least $5,000 in taxes if you took out $50,000. Typically, plan participants only have 60 days to redeposit early withdrawals, so the CARES Act’s three-year window is exceedingly generous.

Were Hardship Withdrawals a Popular Option During the Pandemic?

According to data collected by Vanguard:

  • About 5.3% of 401(k) plan participants withdrew CARES Act distributions through November 2020.
  • The majority of retirement account holders stayed the course with mutual funds, stocks, and bonds.
  • The median age of someone taking a CARES Act withdrawal was 43.
  • The median income was about $62,000.
  • The median amount withdrawn was $12,800.

How to Get Your 401(k) Back on Track After A Hardship Withdrawal

The biggest downside of taking an early withdrawal is that you lose potential growth on your investments and the momentum of compounding interest. If you’re between the ages of 30-50, simply boosting your retirement savings by 1% per paycheck could be enough to rebound from the 401(k) withdrawal. Workers between the ages of 50-70 may need to save more aggressively, depending on how much they’ve accrued, how much they’ve recently borrowed, and how soon they wish to retire.

How to Learn More About 401(k)s, Hardship Withdrawals, and IRS Rules for 2021

Ubiquity is a top provider of Solo 401(k) and small business 401(k) plans. If you have any questions about opening a new retirement account or taking full advantage of an existing 401(k), contact us for expert advice.

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© 2022 Ubiquity Retirement + Savings
Privacy Policy
Do not sell my info
44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

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