As the economy continues an uneven recovery from the pandemic-driven downturn, retirement savers may be anxious about meeting their savings targets in 2021. Thankfully, small business owners and their employees can still take advantage of substantial savings with a 401(k) plan. Even in times of economic uncertainty, it’s still a good idea to contribute enough to your 401k to receive matching contributions from your employer.
Here are some tips for how to maximize your retirement savings in 2021 with a 401(k):
Save the Maximum Allowed by the IRS
The IRS 401(k) limits for 2021 allow employees in Traditional or Safe Harbor 401(k) plans to save up to a maximum limit of $19,500. Employers with matching contributions are allowed to bring the total contribution up to $58,000.
Switch from SIMPLE to a Traditional or Safe Harbor Plan
Small business owners with less than 100 employees are drawn to SIMPLE 401(k) plans due to their easy administration and exemption from annual nondiscrimination testing. However, one may consider switching to a similar Safe Harbor plan, which offers the same test exemption, but with higher limits.
Make Catchup Contributions
If you are over 50 years of age, you may put away an additional $6,500 in 2021 401(k) catchup contributions. This allowance is on top of the $19,500 individual or $58,000 combined maximums.
Calculate How Much You’ll Need
It’s important to know where you are and where you’re headed. Try Ubiquity’s Retirement Calculator to learn how much you should be saving toward your future today. It may also be worth reaching out to your plan administrator to discuss your goals and anticipated retirement lifestyle; a Morningstar report found that plan participants who received expert guidance saved 40 percent more than those who received no help at all.
Make Sure You’re Saving Enough to Get the Employer Match
Sixty percent of workers had access to a 401(k) plan in 2020, and 72 percent of those employees participated. Many workers were also passing on the company’s matching funds, which is essentially passing up free money. Keep in mind, contributions are typically made pre-tax, which also helps you save more this year by reducing your taxable income. If you contributed 5% or $2,500 a year on a $50,000 salary to get the employer match, and your employer put in another $2,000 in matching funds, the amount invested for that one year would be worth $26,200 in 30 years, assuming a 6% return. If you contributed as much over 10 years, you’d have $202,300 after 30 years – with $89,900 from the employer!
Start by Making Small Changes
Financial advisors recommend saving 10-15% of your salary for retirement. Only 13% of savers are able to max out their 401ks to the $19,500 limit. Time and consistency can build wealth just as well. Start by contributing 1-5% more each pay period. Rebalance your 401(k) portfolio on a quarterly – or at least annual – basis to ensure your investments are earning greater returns year-over-year.
Contact Ubiquity to learn more about setting up a small business 401(k), starting a Solo 401(k), or maximizing your company’s plan up to the 2021 retirement plan contribution limits. Call today to see how simple it can be to start saving for retirement with an affordable and easy 401(k) plan.