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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

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.

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.  Companies with employer 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. It is also recommended that a rebalance of your 401(k) on a quarterly–or at least annual basis may 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.

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.

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.

IRS 401(k) Limits 2021

Dylan Telerski / 28 Jan 2021 / 401(k) Resources

2021 401k limits

If you are looking to save more money toward your retirement savings next year, you may be wondering how much the IRS will allow in tax deferrals for 2021.

One of the key benefits of savings accounts like 401(k)s, IRAs, and HSAs is that you can deduct the money you put in off your taxable income this year, thus lowering your tax bracket. With the exception of Roth accounts, you do not have to pay taxes on the amount of money saved until you withdraw the money from your account in retirement.

Additionally, your invested money will be generating returns and compounding interest over the years. As long as your 70th birthday isn’t until after July 1, 2019, SECURE Act changes to 401(k) distribution rules stipulate your Required Minimum Distributions aren’t mandatory until you turn 72 (an increase from 70.5).

401(k) Contribution Deadline in 2021

Every year, around October, the Internal Revenue Service announces their updates for the coming year.

You have until your taxes are due on April 15th to continue making your contributions for the year – which means, if you’re reading this in January of 2021, you still have 3.5 more months to meet the 401(k) contribution deadline for 2020. also not that they need to declare their deferrals on 12/31/2020 in writing if they intend to fund in 2021. You have until April 15, 2022 to finish making your contributions for 2021.

 

2021 401(k) and 403b Individual Contribution Limits

The individual contribution limits and catch-up contributions for 2021 remain the same as 2020.

  • Age 49 and Under: $19,500
  • Age 50 and Older: $26,000 (Additional $6,500)

Even if you don’t turn 50 until December 31, 2021, you can still make the catch-up contribution for the year.

2021 401(k) Maximum Employer/Employee Limits

Most 401(k) plans allow employer contributions through a non-elective contribution or a match formula.

  • This amount will increase by $1,000 in 2021, from $57,000 to $58,000.
  • If you meet the individual maximum, your employer can add on up to $38,500 in additional funding.
  • Catch-up contributions are not included in the limit, so those 50+ could see accounts worth $64,500.

Every plan is different, so refer to your Plan Document to be sure you maximize 401(k) contributions.

SEP IRA and Solo 401(k) Limits in 2021

If you have a SEP IRA or Solo 401(k), you may contribute up to the limit as both Employer and Employee.

  • The maximum is $58,000 – up $1,000 from 2020.
  • The compensation limit used in the savings calculation increased from $285,000 to $290,000 in 2021.

A spouse may contribute the same amount to the plan, effectively doubling your tax-free household savings and retirement earnings!

SIMPLE 401(k) Limits for 2021

A SIMPLE small business 401(k) offers easier administration and exemption from nondiscrimination testing.

  • The limit for SIMPLE 401(k)s remains unchanged in 2021 at $13,500.
  • The catch-up contribution of $3,000 (for a total of $16,500) for those over 50 is also the same.

2021 Highly Compensated Employee and Key Employee Definitions and Limits

Employers with Traditional 401(k) plans need to know who to consider a “Highly Compensated Employee” or “Key Employee” to ensure they pass nondiscrimination testing for the 2021 plan year. If you are worried about passing these tests every year, you may consider a Safe Harbor 401(k), which are not subject to such rules.

  • Key Employee Officer Compensation: $185,000
  • Highly Compensated Employee: $130,000
  • Annual Compensation Limit: $290,000

2021 Roth and Traditional IRA Contribution Limits

An IRA is another type of retirement savings account you may have.

  • Age 49 and Under: Up to $6,000 (must have earned income)
  • Age 50 and Older: Up to $7,000 (Additional $1,000)

2021 Traditional IRA Modified Adjusted Gross Income Limits for Full Deductibility

For full deductibility of a Traditional IRA in 2021, you will need to earn no more than:

  • $105,000 if filing joint (increased by $1,000 since 2020)
  • $66,000 if filing single (increased by $1,000 since 2020)

Full deductibility is available for working or nonworking spouses of plan participants who are not covered by an employer and whose Modified Adjusted Gross Income is less than $198,000 (up $2,000 since 2020).

Note: If neither participant or spouse are enrolled in a workplace plan, then the Traditional IRA contribution is always tax-deductible, regardless of income.  

2021 Traditional IRA Modified Adjusted Gross Income Limits for Partial Deductibility

For partial deductibility of a Traditional IRA in 2021, you will need to earn no more than:

  • $125,000 if filing joint (increased by $1,000 since 2020)
  • $76,000 if filing single (increased by $1,000 since 2020)

Partial deductibility is available for working or nonworking spouses of plan participants who are not covered by an employer and whose Modified Adjusted Gross Income is less than $208,000 (up $2,000 since 2020).

 Note: If neither participant or spouse are enrolled in a workplace plan, then the Traditional IRA contribution is always tax-deductible, regardless of income. 

2021 Roth IRA Modified Adjusted Gross Income Phase-Out Ranges

If your Modified Adjusted Gross Income is between limits in 2021, your contribution limits will be reduced:

  • Individuals Filing Single: $125,000-$139,999
  • Married Couples Filing Joint: $198,000-$207,999

If your Modified Adjusted Gross Income is above these limits, you cannot contribute at all in 2021:

  • Individuals Filing Single: $140,000
  • Married Couples Filing Joint:  $208,000

 2021 Health Savings Account (HSA) Contribution Limits

A Health Savings Account is yet another method of reducing your taxable income for 2021, but all the money must be used on health-related expenses.

  • Individual (Employer + Employee): $3,600 (up $50 from 2020)
  • Family (Employer + Employee): $7,200 (up $100 from 2020)
  • Age 55 or Older: Additional $1,000

Catchup contributions can be made any time during the year in which the HSA participant turns 55.

Do You Have Questions About Your 401(k) Contributions for 2021?

Ubiquity is a solopreneur and small business 401(k) plan provider offering full support for both employers and employees. Contact us to learn about starting a new 401(k), switching to a different type of plan, 401(k) withdrawal rules, or maximizing your contributions in 2021.

 

In the year you turn 50, you become eligible to put aside more tax-shielded money into your 401(k) plan. The tax deduction for a catch-up contribution can save you more than $1,000 on your annual IRS bill. On top of that, you’ll be earning investment returns and compounding interest on the additional money saved.

If you’ll be hitting that 50 milestone birthday in 2021, now is a good time to ensure your percentage is sufficient to reach the new maximum 401(k) contributions (including the catch-up contribution), so you can maximize your retirement savings.

Are 401(k) Catch-up Contributions Increasing in 2021?

Unfortunately, NO! The 401(k) catch-up contribution limit for Traditional and Safe Harbor plans will remain unchanged at $6,500 for 2021. The regular contribution limit also remains unchanged at $19,500 – which means, if you are turning 50 in 2021, you will be able to save up to $26,000 in a tax-advantaged retirement saving account.

How Much To Save To Maximize a 401(k) in 2021

Nearly all 401(k) plans (98%) permit catch-up contributions, but, according to an analysis by Vanguard, only 15 percent of eligible participants take full advantage.

It can be difficult for the average worker to put away $26,000 into a 401(k) plan. Earners making $100,000 a year would have to save more than a quarter of their pay to take full advantage of the catch-up contributions.

In a nutshell, if you’ll be 50 in 2021, you’d need to contribute $2,166 per month or $541.50 a week into your 401(k) plan.

How Much Can SIMPLE 401(k) Account Holders Contribute As a Catch-up in 2021?

SIMPLE 401(k)s are designed for small businesses with 100 or fewer employees. Employers must contribute to these plans, and employees must be fully vested, but the plans are easy to administer and also are not subject to annual nondiscrimination testing. Employees 50 or older can save an extra $3,000 as catch-up contributions to SIMPLE 401(k) plans. This figure has remained unchanged since 2015.

Are Employer Contributions Going Up in 2021?

One of the benefits of a 401(k) plan is that your employer may also contribute to your retirement savings, either through a match or as a nonelective contribution. On top of the $19,500, your employer can contribute an extra $38,500 to bring your account to a total of $58,000. The 2021 amount has increased by $1,000 from a maximum of $57,000 in 2020. For those 50 or older, who choose to make an additional $6,500 catch-up contribution, that brings a maximum of $64,500 in 2021.

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

The employer contribution figures are also important if you have a Solo 401(k) account, as you are contributing as both employer and employee. Here’s another bit of good news for 2021: Solo 401(k) participants can also include their spouses to effectively double their tax-advantaged savings for the year to $116,000 — plus $13,000 if they are over 50 – for total household savings of 129,000 in 2021.

The household can deduct this amount off the taxable income for the year and pay taxes only as you make your 401(k) withdrawal in retirement. Currently, the 401(k) distribution rules do not require you to remove money from your account (as “RMDs,” Required Minimum Distributions) until you are 72 years of age. The longer the cash sits, the more it earns in profits and compounding interest.

Are Catch-up Contributions Allowed in Roth 401(k)s?

YES, you can make the $6,500 catch-up contribution if you have a Roth 401(k) account. You won’t get the immediate tax break that a Traditional 401(k) plan provides, but you also won’t have to pay tax on the investment growth of that extra $6,500/year.

Best of all, this money is 100% yours– without owing tax or penalties if:

  •  You’re at least 59½ years old
    and
  •  You’ve been contributing to the account for at least the previous five year.

These “qualified” withdrawals can also be taken if you become disabled or to your beneficiary after your death.

Do Other Retirement Accounts Allow Catch-up Contributions?

Most 401(k) plans allow catch-up contributions. Additionally, catch-ups are allowed by other types of retirement savings plans, such as:

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

The maximum catch-up contribution allowed for IRAs in 2021 is $1,000 – a figure unchanged since 2006.

Will a 401(k) Catch-up Help You in 2021?

The 401(k) catch-up contribution is based on the premise that most people hit their peak earnings in their fifties. You may not have saved aggressively prior to this point, so the extra dollars come in handy, particularly as you get closer to your golden years.

Here’s an example of how a 401(k) catch-up contribution might work:

  • A couple earning $130,000/year in the 22% tax bracket puts away the standard $19,500 and additional $6,500 catch-up contribution.
  • By saving the maximum, the couple reduces their taxable income substantially and is now in the 12% bracket. The reduced tax rate saves them $5,720 in taxes this year. The catch-up contribution alone produced a tax discount of $1,430.
  • They can also put away $14,000 into a Roth IRA at a 12% rate, paying just $1,680 in taxes to save a bit of tax-free cash for their retirement years.
  • All things considered, the couple will effectively save $40,000 per year from ages 50 to 66 to produce over $1 million by the time they reach full retirement age.

Had the couple opted out of the catch-up contributions, they’d owe an extra $1,870 in taxes each year, which could add up to $50,000 in lost savings once investment returns are calculated. The potential impact is even higher in the upper tax brackets. Most people see decreased annual income after retiring and are taxed at a lower rate.

So, will the 401(k) catch-up contribution help workers over 50 save for a nice retirement? The answer is YES!

Set Up Your 401(k) with Ubiquity

Employers and employees can call upon Ubiquity, a Small Business 401(k) provider, to learn more about setting up a 401(k) plan and maximizing savings. Ubiquity is unique in that we charge a transparent flat rate for service that does not depend upon the Assets Under Management or the number of people covered by the plan. Contact us to learn more.

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

Download the Ubiquity Retirement + Savings 2021 Contribution Guide

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

$19,500

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 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.

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)

2021 Highly Compensated and Key Employee definitions and limits

Key Employee Officer Compensation

$185,000

Highly Compensated Employee

$130,000

Annual Compensation Limit

$290,000

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

Single

$66,000-$76,000

Married – Filing joint returns

$105,000-$125,000

Married – Filing separately

$0-$10,000

Non-active participant spouse

$198,000-$208,000

2021 Roth IRA modified adjusted gross income phase-out ranges

Single

125,000-$140,000

Married – Filing joint returns

$198,000-$208,000

Married – Filing separately

$0-$10,000

2021 Simple IRA contribution limits

Age 49 and under

$13,500

Age 50 and older

$16,500

2021 Health Savings Accounts (HSA) contribution limits

Individual (employer + employee)

$3,600

Family (employer + employee)

$7,200

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.

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

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) plan 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.

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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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