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Category: 401k Resources

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

Contact your plan sponsor right away if you think you have contributed too much to your 401k — 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 401k?

The IRS limits the amount you can put into a tax-advantaged 401k 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 401k plan.
  • You work multiple jobs with more than one 401k.
  • You received a pay raise or bonus, which included automatic 401k deductions.

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

How many employees do you have?
I am a sole proprietor
(just me/or my business partner/spouse)

How to avoid a 401k overcontribution

Juggling multiple 401ks 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 401k 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 The interest earned on the amount is taxed when the money is withdrawn.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 401k 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 401k, 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 401k plan provider, Ubiquity is responsive to the needs of employers and employees, including concerns about juggling multiple 401k plans or overcontributing. We provide employees with financial wellness tools through the Edukate platform to help you reach your goals.

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

  • Traditional 401k (age 59.5+): You’ll get 100% of the balance, minus state and federal taxes.
  • Roth 401k (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 401k Early?

Consider this concrete example. Let’s say your plan allows early distributions, so you decide to take $10,000 out of your 401k. 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.

How many employees do you have?
I am a sole proprietor
(just me/or my business partner/spouse)

Should You Cash Out a 401k 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 401k plan. However, the check balance will only be for 70% of your 401k balance — with 20% deducted for taxes and 10% deducted as a penalty.

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

Some plans allow loans from 401k 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 401k (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 401k withdrawal, taxed as ordinary income and subject to the 10% withdrawal penalty.

Compared to a loan, an early 401k 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 401k loan).

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

You can cash out a 401k 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, 401k 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 401k 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 401k 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 401k? Try our 401k calculator to see if this option is right for you.

In 2020, the total annual contribution maximum, including 401k 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 401ks 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 401k With Employer Matching?

Of course, how much you can contribute to a 401k 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 401k?

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 401k?

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 401k, 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 401k 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 401k 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 401k), 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 401k 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 401k 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 401k 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 401k 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 401k 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 401k plans or if you have questions about making a 401k withdrawal.

Generally speaking, single-file individuals may contribute up to $19,500 to a 401k 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 401k 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 401k 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 401k, 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 401k-sponsoring employer – “Compensation” covers paycheck income, overtime, bonuses, commissions, and salary deferrals made toward 401ks.
  • Owns more than 5% of the interest in the business sponsoring his or her 401k 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 401k contributions if they are not designated HCEs.

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

What Is the 401k Limit for 2020?

Dylan Telerski / 17 Jun 2020 / 401k Resources

2020 Contribution Limits

Maximum 401k contributions offer a shield from tax liability while allowing you to earn more money for retirement. Tax-deductible contributions to retirement accounts are subject to IRS limits, which may change from year to year. The individual 401k limit for 2020 is $19,500 for those under 50, and $26,000 for those 50+.

Has the 401k limit changed in 2020?

The IRS sometimes adjusts the maximum 401k limit based on cost of living increases. Last year, they allowed $19,000 in contributions. This year, the amount increased $500.

What catch-up contributions are allowed?

Catch-up contributions for those over 50 have increased $500 to $6,500. The 8.3% increase is well above the recent 1-3% annual inflation rates. This allowance can help you catch up on retirement savings if you started late.

What is the combined employer and employee 401k limit in 2020?

Most employer plans agree to match some or all employee savings. The employer match is free money on top of the $19,500 individual limit. The combined employer and employee contribution limit is $57,000 in 2020.

If you can’t afford to save to the full 401k limit, you should at least strive to meet employer match requirements. Plans vary from employer to employer, with some offering to match 50% of your contributions up to 6% of your salary, and others offering to match 100% of your contributions up to 3% of your salary.

What about Solo 401k plans?

The self-employed, freelancers, and solopreneurs can contribute to Solo 401k plans as both employee and employer. In 2020, the total amount allowed is $57,000, with another $6,500 allowed for those over 50. If you are eligible for the catch-up contribution, you can contribute up to $63,500 into a Solo 401k for 2020.

If you’ve already hit the maximum, you can add a cash balance plan to the mix to double or even triple your tax savings.

What about SIMPLE plans?

Companies with fewer than 100 employees may have a SIMPLE retirement savings plan. The contribution limit for SIMPLE 401k, 403b, and IRA plans was raised by $500 to $13,500 in 2020.

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

Contribution limits for 403b nonprofit and 457 government plans have also increased to $19,500.

What can you contribute to IRAs in 2020?

Contribution limits for Traditional and Roth IRAs remained unchanged at $6,000 for 2020. Those over 50 can catch up with an extra $1,000. Eligibility to contribute to IRA plans may be limited by your income range, marital status, and workplace retirement plan availability.

Should you hit the 401k limit?

Many Americans like to take advantage of Traditional 401k options because their contributions are considered pre-tax. Once that $19,500 is in your retirement account, it grows, tax-deferred, until you begin withdrawing that money in retirement. Also, contributing to your 401k limit reduces your annual income level at tax-time.

For instance, if you are under 50 years old earning $210,000/year, but you set aside the maximum $19,500, you will only be taxed on $190,500. The reduced tax burden also takes you from the 35% to 32% tax bracket for the year. Instead of paying $73,500 in taxes, you will be paying $60,800.

Financial advisers generally recommend setting aside 15 percent of your income for retirement.

From making Roth 401k contributions to avoiding penalties by not withdrawing funds early, there are several strategies for reducing your tax burden with a 401k retirement savings account.

Avoid paying additional taxes and penalties by not withdrawing your funds early.

First and foremost, you want to avoid withdrawing money from a traditional IRA before age 59.5. There is a 10% early withdrawal penalty on top of the income tax owed. However, if you leave your job at age 55, you may be able to at least take a penalty-free 401k withdrawal from that particular job under the “Rule of 55,” though you’ll still be hit with income tax.

You may be eligible to take out a fixed five-year loan worth up to 50 percent of your balance without incurring additional taxes – as long as you pay the money back on-time. Alternatively, you may qualify for a hardship exemption that absolves you from having to pay an IRS penalty at the very least.

Make Roth contributions, rather than traditional 401k contributions.

If you expect to be in a higher tax bracket in your retirement years, you may consider setting up an after-tax Roth account, where you pay your taxes sooner rather than later. When you take distributions out in retirement, you will owe no tax, as you have already paid it when you put the money into your account.

While you don’t avoid paying taxes entirely, a Roth 401k allows you to avoid paying tax on any earnings and interest you may have accumulated over 20-30 years.

Delay taking social security as long as possible.

Keeping yourself in a lower tax bracket will reduce the amount of your tax liability. If you don’t need that much money right now, you can live off your 401k withdrawals starting at age 59.5 and wait until age 70 to begin collecting Social Security benefits. Not only does it reduce the taxes owed now, but waiting until “full retirement age” also increases your payment by almost a third later on.

Rollover your 401k into another 401k or IRA.

Quitting, getting laid off, or getting fired from a job that provides a 401k could trigger a taxable event. If you have a very small amount in the account ($1,000 or less), you may be able to leave the money where it is. If the money is between $1,000-$5,000, you may want to roll the cash over into an IRA or do a custodian-to-custodian transfer to a new employer’s 401k or a solo 401k. You have up to 60 days to roll the money over without being charged tax.

Consider tax loss harvesting.

Tax-loss harvesting helps investors minimize what they pay in capital gains taxes by offsetting the amount they must claim as income. Capital losses occur any time an asset diminishes in value and is sold for a price lower than the initial purchase price. Selling investments at a loss can lower or even eliminate the amount of taxes paid on gains that year.

Tax-loss harvesting only applies to taxable investment accounts – not IRA or 401k accounts, which grow tax-deferred and are not subject to capital gains taxes. Married couples can claim up to $1,500 (filing single) or up to $3,000 (filing joint) per year in realized losses to offset federal income tax.

Tax-loss harvesting won’t help you avoid paying tax on a 401k withdrawal directly, but it can offset your overall tax obligations.

Contact Ubiquity for details on 401k plans, including questions on 401k withdrawals.

401k plans are for private, for-profit businesses. 403b plans are for tax-exempt organizations and non-profits.

The 401k and 403b are both tax-advantaged retirement savings plans. Both accept payroll deductions and help employees grow their retirement nest eggs through investment options like stocks, mutual funds, ETFs, and other vehicles. Both allow for employer match or profit-sharing contributions at the employer’s discretion, up to 25% of eligible payroll.

Loans can be taken out from both plans if necessary, offering a low-cost lifeline for buying your first home, paying college tuition, or staying afloat during emergency situations.

Differences between 401k and 403b

The plans differ in terms of:

Plan Sponsors

ANY employer, big or small, can sponsor a 401k if they choose to do so.

On the other hand, only non-profit companies, religious organizations, school districts, and governmental organizations may have a 403b plan.

Employee Eligibility

To be eligible for a 401k, participants must be at least 21, with at least one year of service and 1,000 hours or more of service per year. Union employees entered into collective bargaining agreements and non-resident aliens are generally ineligible. Individual employers can mandate when employees become “vested” in the plan.

To be eligible for a 403b, there are no age or annual requirements, but employees must work more than 20 hours per work. Professors on sabbatical, union employees, and non-resident aliens are generally excluded. Only certain types of industries may have a 403b.

Deductions

The 401k’s employer contributions are deductible for employers, whereas 403b employer contributions are tax-deferred for employees. Both accounts are pre-tax and tax-deferred for employees.

Contribution Limits

The deferral limit for both 403b and 401k is $19,500, with an additional $6,500 in catchup contributions allowed for those over 50.

However, the 403b plan allows workers with at least 15 years of service to add another $3,000 to their limit each year, to a maximum of $15,000.

Investment Options

A 401k account allows for a vast range of investments, including index funds, bond funds, large-cap and small-cap funds, real estate funds, foreign funds, and more – though they may be limited by the employer or broker selected.

By comparison, the 403b options are limited. In the past, employees could only invest in an annuity — a financial product offered through insurance companies that provides fixed payments to the annuity holder. Only recently have mutual funds become available, but not all employers offer them.

Administration

In the past, 403b plans were exempt from certain administrative processes that applied to 401k plans, thus lowering the overhead administrative costs. However, the limited investment options often led to higher fees than many 401k plans. Today may 403b plans are required to follow similar ERISA compliance requirements, so there is not much difference in administration.

Cost

Overall plan costs are determined by the types of investments selected, the level of service, and the plan provider/broker selected. Certain types of assets, like a variable annuity, may have higher fees that cut into your earnings. It’s worth exploring alternatives if you are looking to cut costs.

Which one is better?

Both options are great ways to save for retirement. However, if you find the investment choices are too limited and the costs too high for a 403b, switching to a 401k is always an option.

Since 1999, Ubiquity has offered flat-rate small business 401k plans with full transparency and no AUM fees or hidden costs. You may work with the broker of your choice to select investment options, while we administer the plan and provide full employer/employee support. Contact us to learn more.

If you are over 50 years of age, you may contribute a maximum of $26,000 to your 401k plan in 2020.

Nearing retirement and trying to save a little extra? You’re in luck. There is a special provision for savers over 50 called a catchup contribution that can help you achieve your retirement goals.

What Is a Catchup Contribution?

A catchup contribution allows people ages 50 or older to make additional contributions to their retirement accounts. This rule applies to both 401k accounts, as well as individual and/or individual retirement accounts (IRAs) and allow for larger deferrals than the standard contribution limit.

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

How many employees do you have?
I am a sole proprietor
(just me/or my business partner/spouse)

How did 401k catchup contribution limits change in 2020?

The catch-up contribution limit for employees 50+ increased by $500– from $6,000 to $6,500.

How much can you save for your retirement in 2020?

If you want to maximize your retirement savings, you can invest in multiple accounts:

  • Save up to $7,000 in your IRA: The 2020 contribution limit for Traditional IRAs and Roth IRAs remained the same at $6,000, with $1,000 allowed for 50+ catchup contributions.
  • Save up to $16,500 in a SIMPLE 401k: The SIMPLE 401k contribution limit increased by $500 to $13,500. The catchup contribution amount is $3,000.
  • Save up to $26,000 in a 401k, 403b, 457, or TSP. The regular contribution limits increased by $500 — from $19,000 to $19,500, regardless of employee age. Employees over 50 can add $6,500.

Why did the IRS increase the maximum contribution limits?

The Internal Revenue Service announced these increases as “cost-of-living adjustments.”

History of catchup contributions

The catchup contribution provision was created by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), so that older individuals would be able to set aside enough savings for retirement.

Employee catchup contributions have been allowed since 2002. Back then, employees could put away $11,000 for their retirement, plus an extra $1,000. The catchup contribution increased $1,000 every year from 2002-2006 and then remained at $5,000 for three years.

From 2009-2014, the over-50 catchup was $5,500. From 2015-2019, employees over 50 could contribute an additional $6,000 to their accounts.

When can you make catchup contributions?

“Catch-up contributions” allow people age 50 and older to set aside extra money to compensate for their younger years where they may not have saved enough. Generally, people earn more as they advance in age, which is why the magic number for catchups starts at 50.

However, you don’t have to wait until your 50th birthday to start catching up with your contributions. Technically, you can start putting in catchup contributions as of January 1 of the year you are set to turn 50.

Should you take advantage of the catchup contribution?

The tax benefit of a 401k catchup contribution can be huge. For instance, if you are a 50-year-old worker in the 24% tax bracket who contributes the full $26,000, you can reduce your tax bill by $6,240 — $1,560 more than younger workers.

High earners have the most to gain. If you max out your 401k in the 37% tax bracket, you could reduce your income tax bill by $7,215 in 2020; if you are married and your spouse maxes out, you’re in for double the savings.

Despite the great news, only 15% of plan participants are taking full advantage of their catchup contributions–either because they’re unaware the benefit exists, they haven’t prioritized their tax-advantaged retirement savings account, or they can’t afford to set aside the extra money.

Saving for your retirement can be easier than you think with our employee financial wellness tools. Contact Ubiquity to learn how to set aside the maximum amount for your retirement.

What to do with a 401k after retirement is based upon your individual plan, IRS distribution rules, and your age of retirement.

Ubiquity breaks it down by age group and helps you explore your retirement planning options.

Continuing contributions (Under 72 years of age)

  • You may elect to rollover your 401k account into a Solo 401k or an IRA to continue investing.
  • This solution is possible if you still earn some type of taxable wages, salaries, commissions, tips, or passive income from self-employment. Certain types of alimony payments may also qualify.
  • Under the SECURE Act, you can now contribute to a traditional or Roth IRA for as long as you wish.
  • Your plan administrator will distribute your savings into the new account for you within 60 days.
  • You may also elect to receive a check and deposit the amount into the new account yourself.
  • Rolling over your 401k within 60 days will prevent you from having to pay taxes on the full amount.

Taking early distributions (Under 55 years of age)

  • You can take money out of a 401k now if you need it, but you will be required to pay a 10% IRS penalty and income tax on the amount you take out.
  • You are not required to take a distribution as soon as you retire. Your plan administrator will still maintain your plan if you have over $5,000 invested, thus allowing your savings to accrue.
  • You will be unable to contribute to a 401k held by a previous employer unless you choose to roll it over to a new 401k or IRA.
  • If your account balance is between $1,000 and $5,000, your company is required to roll the funds into an IRA if they are forcing you out of the plan.

Taking advantage of the Age 55 Rule (Ages 55-59)

  • You can avoid the IRS 10% early withdrawal penalty if you retire or lose your job after age 55. This tax-free distribution applies only to the money from the most recent employer you just left.
  • If you had money in an earlier 401k account, it is still subject to the penalty unless you wait a few years.

Taking the money on-time (Ages 59.5 – 71)

  • The penalty-free retirement age is 59 1/2, so if you have reached that point, you can begin taking regular distributions from your 401k in the form of an annuity, either for a fixed period or over your anticipated lifetime. You may also choose to take non-periodic lump sum withdrawals if it is your preference.
  • Unless you have a Roth 401k, you will pay tax on the distribution as if it were paycheck income. Roth accounts allow tax-free withdrawals if the account holder is 59.5 or older and has had the account at least five years.
  • The rest of your 401k account balance remains invested according to previous allocations, so the performance of your portfolio will also dictate the duration of your payments to some extent.

Taking required minimum distributions (Ages 72+)

  • You are generally required to take regular or periodic distributions by April 1st the year you turn 72.
  • Some plans will allow you to defer distributions until the year after you retire if you’re still working.
  • Your distributions will be calculated based on your account balance and life expectancy.
  • You may choose to take out more than your RMD, but you cannot take out less.
  • The age for RMDs used to be 70.5, but increased to 72 in December 2019 with the SECURE Act.

The IRS isn’t the only one who calls the shots with how retirement money is taken. Companies may have their own rules about taking distributions, so it is always wise to review your plan documents, call your financial adviser, or speak with your plan provider before making any decisions.

It’s easy to be overwhelmed with options when it comes to individual retirement plans and how best to choose and manage your 401k. Ubiquity can streamline the process and help you tailor an approach that fits your unique needs.

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© 2020 Ubiquity Retirement + Savings
Privacy Policy
44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

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