Ubiquity

Author: Dylan Telerski

Dylan is a marketing specialist at Ubiquity Retirement and Savings. A passionate champion for small business, she can be found demystifying the financial industry, advocating for the underdog, and making playlists you did not ask for.

Today, we’re excited to announce the launch of Simply Retirement by Principal® with plan services by Ubiquity Retirement + Savings®–a 100% digital retirement solution for financial professionals and their small business clients looking to start retirement plans.

 

Simply Retirement for Financial Professionals

Simply Retirement by Principal® is an online 401k plan designed to be the most straightforward, budget-friendly approach to setting up a retirement plan—with education and resources to help businesses with 100 employees or less feel more confident along the way.

Since our inception in 1999, Ubiquity’s mission has been to empower small businesses and their employees to create a more secure financial future and peace of mind, by leveraging technology with affordable and effective retirement solutions, and world-class customer support. Principal has a time-honored legacy of helping people and companies around the world build, protect, and advance their financial wellbeing.

We’re proud to be working with Principal, pairing their 75+ years of experience with the simplicity and cost-effectiveness of Ubiquity’s online platform. By working together, we can bring greater retirement plan access to the 5 million U.S. small businesses not currently offering their employees this essential benefit.

Click here to read today’s press release introducing Simply Retirement by Principal® or visit simplyretirement.com/financial-professionals to learn more.

Why Now is a Good Time to Start a 401k

Dylan Telerski / 4 Aug 2020 / Business

4 coworkers look at financial paperwork together, wearing PPE to prevent the spread of coronavirus

It may seem counterintuitive to put money into a 401k amid Stock Market volatility, but that’s just what financial advisors are recommending. It’s not just a matter of doing your part to keep the American economy afloat, but historically speaking, it’s a matter of good investment.

Here’s why:

It’s a buyer’s market.

“Buy low, sell high” is the conventional wisdom. The opportunity to buy a greater volume of stocks at rock-bottom prices is now! Beginner 401k investors can put a small, fixed amount – say $1,000 – into their account every month, regardless of how bleak the situation appears. They can invest in undervalued stocks that pay dividends. By contributing to an employer-sponsored 401k plan, retirement savers can choose a diverse portfolio of stocks, bonds, and alternative investments to invest in.

The economy will bounce back.

Here’s the good news: since 1900, the average economic recession has lasted 15 months with an average cumulative loss of 38 percent, while the subsequent expansion has lasted 6.5 years, with returns averaging 339 percent. While you can never guarantee what will occur this time around, history indicates “what goes down must come up.”

There are short-term savings to consider.

If you’re an entrepreneur, the cost of starting a small business 401k is deductible on your taxes. In fact, thanks to the SECURE Act passed last year, you may be eligible to receive a tax credit of up to $5,000 per year for the first three years of the plan.

On top of that, if you sign up your employees using auto-enrollment, you can add an additional $500 tax credit per year for the first three years. PLUS, you are eligible to write off 100% of the matching contributions you make to employee plans AND 25% of whatever your employees put into their own plans as well.

Your employees will be able to deduct up to $19,500 off their income tax burden if they elect to contribute up to the 2020 maximum. Those over 50 who got a late start can throw in an extra $6,500 on top of that. If you are contributing to your own 401k as both business owner and employee, you can put away up to $57,000 in tax-free income this year to reduce your liability to Uncle Sam.

There are long-term benefits, too.

For business owners, a 401k is one of the most competitive benefits you can offer your employees – not to mention, it is less expensive to run than a health care program. Providing workers with financial security boosts the morale of younger workers and enables older workers to leave when they are mentally ready, rather than sticking it out long after their motivation has dwindled because they can’t afford to retire.

For individuals, saving money for the future in a tax-deferred 401k account allows any profit and interest gained to compound over the years. The average return over a decade has been a steady 7 percent, which outpaces inflation and sets you up for a comfortable monthly stipend when you stop working. So, for a younger worker, a $5,000 balance today could be worth $57,900 in 35 years.

It’s best not to try to time the market.

The Stock Market is unpredictable at best. As Heraclitus opined, “The only constant in life is change.” Investments generally tend to boom during bull markets and shrink during bear markets, but there are still safer places to park your money during a slide.

Most investors will look at a middle-ground defensive strategy that involves rebalancing the portfolio with more put into stable, large-cap companies that are less affected by economic downturns or a long-term target-date fund. After all, Americans are still buying toilet paper, food, and other necessities. Shifting money away from less-secure growth companies is equally wise, as many of these upstarts lack the financial security to survive.

If you have any questions, contact Ubiquity, a leading 401k plan provider that small businesses have relied upon for flat-rate service with no hidden fees since 1999.

Due to the economic downturn sparked by the coronavirus pandemic, many employers have suspended 401k match contributions for their employees. Cutting out company matches can have enormous repercussions to diligent savers who counted on this employment perk to help build their financial futures. Here we discuss how the COVID-19 crisis has affected 401k matches so far, how it will likely affect businesses great and small in the coming months, and what you can do if your employer suspends its match.

Very Small Businesses Suspend Employer 401k Matches

Plans with 25 or fewer 401k plan participants stopped matching contributions at 5x the rate of companies with 100+ participants between January and May, according to the latest reports. Drawing on data from over 116,500 retirement plans, researchers found employer contributions decreased overall by 11.4% from March through May. The move was driven by business interruptions and closures. Industries like health care, social assistance, accommodation, food service, and retail were particularly affected.

SMB 401k Providers Stay the Course

As of June 2020, nearly 90 percent of plan sponsors said they made no change to employer contributions, according to a Plan Sponsor Council of America survey. Only 5% of plan sponsors suspended their match, 1% reduced them, and another 2.9% were actively considering some type of change.

PSCA Research Director Hattie Greenan explained, “Employers, doubtless helped by support from the Payroll Protection Program, are responding to current conditions by largely staying the course.”

Corporations with Over 5,000 Employees More Likely to Slash Retirement Matches

On the other hand, large firms employing more than 5,000 workers were more likely to pause 401k matching, with 11.6% doing so. Amtrak, Best Buy, La-Z-Boy, Sabre Corp, Marriott Vacations, Choice Hotels, Lands’ End, Tenet Health, Quest Diagnostics, Macy’s, and Norwegian Cruise Lines have all pulled back on matching contributions in the wake of the coronavirus pandemic.

The Fallout May Continue

Willis Towers Watson surveyed 543 companies in June and found that 15 percent had suspended or reduced their match. Another 10 percent said they are considering action. Further, 7 percent suspended nonelective contributions, and another 7 percent are considering it.

When Will Employer 401k Matches Resume?

We’ve seen employer matches fall by the wayside in the past. The 2008 financial crisis also prompted companies to scale back on their employee benefits. From 2007 to 2009, about 10% of 401k plan sponsors stopped making matching contributions, and another 10% ceased elective profit-sharing or nonmatching employer contributions. Five years after the matches dried up, the Chicago Tribune reported the contributions were “making a comeback.”

Thirty-four percent of employers who cut benefits during the current crisis said they had “no set date” for reinstating benefits, but may “at some point.” Eleven percent weren’t sure what the future would hold. Another four percent indicated the change could be permanent.

Other employers had a more concrete timetable in mind – 16 percent planned to reinstate matching “sometime this year,” 32 percent cited “the first or second quarter of 2021,” and 3 percent cited “the second half of next year.”

Specifically, Hewlett-Packard announced a temporarily suspended match from July 1 through December 31, 2020. Allegheny Technologies suspended their company contributions from June 1 through “no later than December 31, 2021.”

On a positive note, Ascensus found that 7.5 percent of the businesses that cut 401k matches in March had reinstated them by May.

What to Do If Your Employer Match is Suspended or Cut

If you can afford it, ramp up your own contributions temporarily to compensate for the missing matched funds. Financial advisors recommend most people setting aside 12 to 15 percent of their gross income for retirement each year, so you’ll want to bridge the gap if you can. If you’ve gotten off to a late start, you should invest 18 to 20 percent. You can justify the expense, as you won’t be vacationing, eating out, or spending as much during the pandemic. Remember, what you put in this year will reduce your tax burden.

If finances are really rough this year, let yourself off the hook and pledge to ramp up as soon as you can. Ask your 401k plan provider about options like taking out early distributions or borrowing from your 401k if you’ve exhausted other options.

Getting insight into how much companies are matching on 401ks in 2020 will help you know how well your employer stacks up and whether you’re in the right ballpark with your contributions.

Long gone are the days where a full pension or government stipend will guarantee you a secure future. These sources of income typically comprise less than half of what you would need to live comfortably in retirement. A 401k investment account is one of the best strategies to bridge the gap and save enough money for your post-retirement years.

In addition to the contribution deducted from your paycheck, about 51% of employers offering a 401k agree to match a certain amount of employee contributions. This generous bonus is literally FREE MONEY that employers add to your retirement savings that will gain interest and compound over time to help you reach your goals faster. There is, however, one caveat to the employer match – in most cases (with the exception of a Safe Harbor nonelective match), how much you receive depends on how much you put in.

Why Do Employers Match 401k Contributions?

Why would employers match 401k contributions? Perhaps the foremost reason is that employers view the matching contribution as a means of attracting and retaining top talent so that they don’t have to continually hire and retrain a revolving door of workers.

It’s also in their best interest to encourage as many eligible employees to participate in the plan and save as much as they can so the highly-compensated employees and business owners can contribute the maximum amounts to their own plans without failing annual IRS tests for fairness and nondiscrimination.

Favorable tax benefits make it even easier for companies to offer this benefit to their workers. Employers can deduct 100% of their matching contributions on their federal income tax returns, as well as 25% of what all eligible employees contribute.

What Is the Best Possible 401k Employer Match?

Employers rarely match 100% of employee contributions. Even if they do, there is a limit mandated by the IRS. For 2020, employees can contribute up to $19,500 to their 401k accounts. Employers can contribute up to $37,500 to reach a combined employee/employer total of $57,000. Employees over 50 can add $6,500 in “catch-up contributions” as well. So that would represent the best possible match – an extra $37,500 put toward your retirement.

How Much Do Companies Typically Match?

More commonly, companies follow a formula to determine their matching contribution. A “50% match” means that for every dollar an employee puts in, the employer adds 50 cents. A “100% match” means the employer puts in a dollar for every dollar the employee contributes. On average, companies donate an extra 4.3% of a person’s pay into their retirement accounts as a bonus.

A 2019 Vanguard study identified the most common 401k match scenarios:

  • About 71% of companies choose: 50% match, up to 6% of the employee’s pay
  • Another 21% of companies prefer: 100% match on the first 3%, 50% match on the next 2% (Safe Harbor)
  • 6% of companies selected: A single or multi-tiered formula, capped at a certain amount (like $2,000)
  • 2% of companies opted for: A variable formula based on age, tenure, and other variables.

The Bottom Line:

Financial advisors recommend contributing enough to receive the maximum employer match, though you can always contribute more as long as you don’t exceed your $19,500 limit. Turning down free money doesn’t make sense unless your 401k performance is so poor it’s not generating returns. Consulting with the 401k plan provider can help you ensure you’re on track to reaching your savings goal. Just be sure you’re signed up with a fee-only small business 401k provider like Ubiquity who doesn’t erode your savings by charging for Assets Under Management or Per-Participant fees.

If your company has been forced to lay off employees during the coronavirus pandemic, you can expect closer scrutiny from your 401k plan auditors this year.

Be prepared to provide more financial documentation than usual, including information on vesting, benefit disbursement, and investments.

The auditor will look to make sure the plan is operating in accordance with the plan-related documents, the Department of Labor requirements, and Internal Revenue Service regulations. Most plans are subject to passing annual IRS nondiscrimination tests to prove that the 401k plan is not merely a tax haven for Highly Compensated Employees, but rather, serves as a benefit to all. Form 5500 will be assessed to ensure all financial information has been reported accurately and completely.

If your 401k plan has 120 or more eligible participants on the first day of the plan year, an audit is required. Once you’ve been audited, you will be subject to the same procedure every year unless the eligible participant number dips below 100.

How Layoffs Can Impact a 401k Plan Audit

If you’ve laid off workers this year, you can expect 401k plan auditors to:

  • Pull bigger samples – When employees are laid off, the number of distributions and the distribution amounts tend to increase, attracting the attention of auditors. Auditors base the samples they audit on the number of transactions and total dollar amounts, so they may pull larger samples for testing purposes.
  • Request additional disclosures – One of the key reasons for a 401k plan audit is to protect employee benefit plans from fraud, such as misappropriation of assets or fraudulent financial reporting. Additional financial documents may be required to provide context about the plan’s vesting, eligibility requirements, benefit disbursements, and valuation of investments.
  • Vesting may be scrutinized – If 20 percent or more of your employees were laid off, it is considered a “partial termination” and the IRS requires that affected employees become immediately fully vested.
  • Ask more questions – Any new procedures of controls added to the plan amid the pandemic will go under a microscope. Auditors may ask what market fluctuations and concerns prompted changes to the 401k plan. They will be checking to see that all the old methods were followed by the letter up until the time the formally requested change kicked in.

How to Prepare for the 401k Audit after Layoffs

Large plans have until July 31, 2020, to complete their audits. If an extension is filed, they can have until October 31 to have the plan assessed.

Auditors will need access to HR, Payroll, and Financial information for each employee in the plan. You’ll need to provide:

  • Executed plan documents and amendments
  • The current year census
  • Last year’s Form 5500
  • Distribution forms
  • IRS determination letter
  • Participant statement and trust reports
  • Plan sponsor financial statements
  • W2s and annual payroll registers
  • Loan documents
  • Certification reports for the plan custodian
  • Discrimination tests
  • SAS 70 report
  • Form 1099 for distributions

In addition to assembling all of the above documents, here’s how employers can prepare:

  • Put a person in charge of process review: It’s imperative that a point person who understands all plan processes is on hand to answer any questions the auditor may have. Maybe this person is someone in HR, or maybe it’s your 401k plan provider. Have that responsibility clearly delegated. Now is also a good time to remove access to plan website for laid-off employees (if you haven’t already) and review security measures designed to prevent fraud.
  • Contact your auditor as soon as possible: Auditors are likely under compressed schedules due to the COVID-19 crisis and may even be working remotely from home. It’s wise to reach out with any questions about the auditing process as soon as possible to ensure everything runs smoothly.
  • Contact your 401k plan provider: Now that you have fewer employees, the contributions from Highly Compensated Employees may start looking a bit top-heavy. Your plan provider can help you perform projections through the end of the plan year to determine whether failure is imminent and even add a Safe Harbor provision to help you avoid testing altogether.

Do you have additional questions about 401k plans, layoffs, and furloughs? Contact Ubiquity for assistance.

2020 Changes to RMD

Dylan Telerski / 30 Jul 2020 / Retirement Trends

Older business man using computer

A 401k is an optimal tool for reducing your tax liability, but you can’t dodge payment to Uncle Sam forever. Required Minimum Distribution rules ensure that people do not accumulate wealth in tax-free retirement savings accounts to leave as an inheritance.

Once employees with 401k or IRA accounts reach a certain age, they must withdraw a minimum required amount from their funds. The withdrawal is generally included on income tax forms, with the exception of a Roth account that was already taxed when first contributed to the account. Your RMD is calculated by your retirement account balance as of December 31 of last year, divided by your Life Expectancy Factor.

In 2019, U.S. workers had to take their RMDs at age 70.5, but much has changed amid the global pandemic crisis. The Setting Every Community up for Retirement Enhancement (SECURE) Act and the Coronavirus Aid, Relief, and Economic Security (CARES) Act both include provisions affecting RMDs in 2020.

Continue reading or contact your 401k plan provider with specific questions about 2020 RMD changes.

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The starting age for RMDs increased from 70.5 to 72 – but not until 2021.

  • In late 2019, the SECURE Act increased the age for RMDs to 72.
  • In March 2020, the CARES Act waived RMDs altogether for the 2020 calendar year.
  • If you turned 70.5 by the end of 2019, resume taking your regularly scheduled RMDs in 2021.
  • If you were under 70.5 by the end of 2019, you don’t have to take your RMD until April 1 after you’re 72.

Those over 70.5 can undo RMDs already taken this year if they are eligible for a rollover.

  • RMDs can be rolled back into the retirement account if you have received the funds within 60 days.
  • RMDs must be directly rolled, but can be taken even if you have completed a rollover within the year.
  • Non-spouse beneficiaries can undo RMDs already taken as long as they do so by August 31, 2020.
  • Rolling the money back means you do not have to include these amounts on your 2020 income taxes.

Beneficiaries can take the year off RMDs

Prior to 2020, inheriting an IRA or 401k account meant taking RMDs based on one’s own life expectancy. This was great news for young heirs who were able to stretch tax deferral for decades. However, this changed with the SECURE Act.

  • Heirs must now draw down the inherited account within 10 years if inherited in 2020 or later.
  • Beneficiaries can skip RMDs for 2020, but they may want to take them if they need the cash now.
  • Holding off on RMDs for a Roth account makes sense, as you accrue tax-free money for a longer time.
  • IRA beneficiaries operating under the five-year rule can take one extra year to draw down the account.

Should you take your RMD in 2020?

The question as to whether or not you should take advantage of the RMD waiver is a personal one.

YES, TAKE IT if…

  • You were planning on these distributions for your living expenses in retirement.
  • You risk getting bumped into a higher tax bracket with a higher balance and withdrawal percentage.

NO, HOLD OFF if…

  • You don’t need the full amount to cover your costs, and you’d like to reduce taxable income for 2020.
  • Some of your investments have decreased in value due to the downturn, and you’d rather wait to sell.

You may also consider taking a distribution this year, but capping it so that you won’t move into a higher tax bracket or trigger steeper Medicare premiums. Whether you’d like a full annual/quarterly/monthly RMD, a partial RMD, or a deferred RMD, you’ll need to contact your Third Party Administrator to discuss your preferences.

Ubiquity is a flat-free 401k plan provider that can offer free, efficient, expert advice on retirement savings. Questions about retirement planning? Employers and employees alike may contact us for details.

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

Fortunately, employers and employees with a 401k 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 401k 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 401ks:

  • 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 401k 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 401k. 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 401k mid-year. The new legislation eliminates the Safe Harbor notice requirement, permits a 401k 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 401k Tax Deductions in 2020

As always, the 401k 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 401k money is taken out in retirement. If the 401k 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 401k Distribution in 2020

Employees may contact their company’s Human Resources Department to change their 401k distribution. Employers can contact their 401k 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 401k 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, 401k 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 401k 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 401k.

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).

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2. Rebalance your 401k 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 401k 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 401k 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 401k 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 401k, 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 401k 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 401k 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 401k plan administrator, to discuss what 401k small business options exist, given your unique situation.

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

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

Solo 401k Investment Possibilities

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

Solo 401k investment options include:

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

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

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

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

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

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

How a Solo 401k Works

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

Solo 401k Limits for 2020

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

Are You Eligible for a Solo 401k?

Take advantage of the widest range of investment possibilities if:

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

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

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.

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44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

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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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