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.

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 – unless you have filed an extension, in which case you may have more time to decide your next move. 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 Previous 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.

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. 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 in 2021. If you are worried about passing these tests every year, you may consider a SIMPLE 401(k) or 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: $285,000

These figures remain the same from 2020 to 2021.

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 above these limits, you cannot contribute at all in 2021:

  • Individuals Filing Single: $125,000 or $140,000
  • Married Couples Filing Joint: $198,000 or $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 $100 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.

 

When 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.

Fortunately, the 401(k) contribution deadline extends further than you may realize; you have until your 2021 taxes are due on April 15, 2022, to make all your contributions and catch-up contributions for the year.

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 over 50 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 $32,000 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. The $6,500 catch-up contribution is added onto this total for a maximum of $64,500 in 2021 for savers turning 50.

 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 70.5 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 – not Uncle Sam’s!

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 2015.

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.

One of the benefits of a Solo 401(k) is that your spouse can also participate in the plan. If you both take taxable income from the same sole proprietorship, your spouse can make equal contributions.

A Solo 401(k) is designed for a business owner with NO employees. However, you may add a spouse to your plan as an exception to the rule. You may also employ:

  • 1099 contractors
  • Minors under 21
  • Union workers
  • Nonresident aliens, and
  • Part-time workers who put in less than 1,000 hours per year

If you plan to hire full-time W2 employees, you will need to stop making contributions and rollover your self-directed Solo 401(k) to a self-directed IRA or small business 401k within a year.

What Is the Benefit of Adding a Spouse to a Solo 401(k)?

A married couple with a Solo 401(k) can contribute a maximum of $114,000 per year for retirement as both employer and employees. If you and your spouse are over 50 years of age, total contributions can reach $127,000. Once the plan reaches $250,000 or more in assets, Form 5500-SF will need to be submitted to the IRS.

Get Your Complimentary Guide to Solo 401(k) plans

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How to Open a Solo 401(k)

Starting a Solo 401(k) online with Ubiquity takes only a few minutes. To get started, you’ll need an Employer Identification Number. You can choose your own investments or work with a broker of choice to select mutual funds, index funds, ETFs, individual stocks and bonds, or real estate investments.

Ubiquity handles all the day-to-day accounting and management for a low monthly fee, while you focus on growing your retirement nest egg. You can open your account at any time, but you’ll need to file the paperwork by December 31 to make it count for this year. Any contributions made until April of next year can be used to reduce tax liability for the year.

How to Include Your Spouse in Your Solo 401(k)

If you’re a sole proprietorship, your spouse will receive a W2 as an “employee.” This solution is best if the spouse has minimal duties in the business.

You can also choose to file as a partnership, where each partner receives a K-1 (Form 1065). The partnership bypasses income taxes, passing profits and losses onto each partner. The IRS views this structure as ideal if both partners contribute materially to the business.

A Qualified Joint Venture may be possible if both spouses work and contribute materially to the business and file a joint tax return. Each spouse reports income gains, losses, deductions, and credits separately on Form 1040 Schedule C.

Spouses can also form LLCs, and C or S corporations.

If you have any additional questions about starting a new Solo 401(k) or adding a spouse to an existing Solo 401(k), don’t hesitate to contact Ubiquity.

Are you ready to retire?

Get Started

With the end of the year fast approaching, many small business owners, independent contractors, and real estate investors are looking for tax savings. December is not too late to open a new 401(k) account, convert to a new retirement account type, or make your contributions. Depending on your situation, you may have more time than you think to plan the ideal tax scenario for 2020.

Contact Ubiquity for assistance with setup and ongoing administration. We cater to small businesses and self-employed individuals with flat-fee plans that meet your business needs and your budget.

Reasons to open a 401(k) before the end of the year

If you’ve put off thinking about your retirement until the end of the year, here are a few reasons to act now:

Generous contribution allowances will help you save for retirement.

401(k) account offers much higher contribution limits than most IRAs – some of which max out at $6,000. SEP IRAs do not allow employee contributions, so you may not be able to save as much as you’d like. In 2020, the annual 401(k) limit is $19,500 for employees or $57,000 for employer/employee totals, plus an additional $6,000 if you’re over 50. Next year, the employee maximum will stay the same, but this amount will increase to $58,000 total and $6,500 for the catchup contribution.

You’ll start compounding interest sooner rather than later.

When you invest in a 401(k), the money you add generates interest. This interest compounds year after year, as you earn interest on your interest.

Here’s an example. Let’s assume a very modest ability to save and a not-so-fantastic economy returning just 5 percent. If you were to put in $5,000 this month and contribute just $100/month to your 401(k), in 30 years’ time, you could have $105,924 saved for retirement.

On the other hand, say you put in the maximum of $57,000 today and contribute at least that much every year for 30 years. You’d be sitting on $4.2 million or more for retirement.

You had a particularly profitable year.

Some 401(k) plans allow you to make a year-end bonus deposit directly into your account to reduce how much taxes you owe for 2020 AND boost your retirement savings without cutting deep into your regular paychecks.

You want to get on track for next year.

Opening a 401(k) now will help you attain your New Year’s resolution to save more for retirement in 2021. Establishing an account with a generous contribution level is one of the best ways to achieve a comfortable future. If you want to hit the maximum for 2021, you can save up to $1,625 per month (for an annual total of $19,500). If you’re over 50, you can put in an extra $541.66 a month ($6,500 total). If you are self-employed, you can contribute as both employee and employer to a maximum of $57,000 a year, plus the over-50 contribution.

The deadline to establish a new Solo 401(k) account is December 31, 2020.

If you are self-employed with no full-time regular employees working for you (with the exception of a spouse), then you could qualify for tremendous tax savings with a Solo 401(k) account. You will be able to contribute as both employer and employee.

This means you can deposit a maximum of $56,000 (plus $6,000 more if you are over 50 years old) for yourself – which will then reduce your taxable income for 2020. You can also add your spouse to double your household savings if your spouse is not covered by another plan.

All you have to do is sign the Solo 401(k) adoption documents by December 31, 2020, and you will have until your tax return due date (April 15, 2021) to make the contributions for 2020. It is possible to apply for extensions to have until July 15 or even October 15.

If you’ve had a very lucrative year, you can also concurrently contribute money each month to put toward your 2021 return. If not, you can always take your time and save for the upcoming year well into 2022 in the same fashion, filing for tax return extensions if necessary.

Employers can adopt a new 401(k) plan by December 31, 2020 – or wait even longer!

The SECURE Act brought good news for employers: an extended deadline for adopting a new Traditional 401(k) plan! You used to have until December 31, but now you have until the tax return deadline – including extensions. Here’s what those 401(k) contribution deadlines look like for the 2020 Tax Year:

  • 12/2/20 – Convert a Traditional 401(k) into a Safe Harbor for 2020 with 3% nonelective contribution.
  • 3/15/21 – Adopt a 2020 Traditional 401(k) plan if you are taxed as a Partnership or S-Corp.
  • 4/15/21 – Adopt a 2020 Traditional 401(k) plan if you are a Sole Proprietorship or C-Corp.
  • 9/15/21 – Adopt a 2020 Traditional 401(k) if you filed an extension as a Partnership or S-Corp.
  • 10/15/21 – Adopt a 2020 Traditional 401(k) if you filed an extension as a Sole Proprietorship or C-Corp.
  • 12/31/21 – Convert a Traditional 401(k) plan into a 4% nonelective safe harbor plan for 2020.

Employees do not have more time to make salary deferrals, but employers have more time to decide whether they want to make a year-end profit-sharing contribution. Adding a Safe Harbor amendment to your plan is a great option if you worry you might not pass nondiscrimination tests for the year. Fortunately, you have plenty of time to make this decision.

Planning for the 2021 Plan Year

Now is also a good time to plan for the 2021 tax year using the following deadlines:

  • 11/2/20 – Notify SIMPLE IRA participants that their plan will convert to a new 401(k) plan on 1/1/21.
  • 12/2/20 – Notify participants that the Traditional 401(k) will convert to a matched Safe Harbor in 2021.
  • 12/31/20 – Plan your conversion of an existing 401(k) to a match-based Safe Harbor for 2021.
  • 10/1/21 – Adopt a new Safe Harbor 401(k) plan for 2021.
  • 12/2/21 – Convert a Traditional 401(k) plan to a 3% nonelective Safe Harbor for 2021.
  • 3/15/22 – Start a new Traditional 401(k) for 2021 if you’re an S-Corp or Partnership.
  • 4/15/22 – Start a new Traditional 401(k) for 2021 if you’re a C-Corp or Sole Proprietorship.
  • 9/15/22 – Start a new Traditional 401(k) for 2021 if you’re an S-Corp or Partnership with an extension.
  • 10/15/22 – Start a new Traditional 401(k) for 2021 if you’re a C-Corp or Sole Proprietor with extension.

If you have any questions about setting up a small business 401(k), contact Ubiquity to administer the plan.

Self Employed business woman at desk

One of the benefits of the Solo 401(k) is that it’s relatively easy to administer, with nothing more than a 5500-EZ form filing due once the total account balance reaches $250,000 or gets terminated.

However, to maximize the tax-exemptions for your small business retirement account, you will also need to claim your Solo 401(k) contributions on your tax return.

Clearing Up Solo 401(k) Confusion

When thinking of your Solo 401(k), it’s helpful to think of yourself as both “employee” and “employer.” Therefore, you will be making two different tax calculations – one for your business’ net earnings and one for your business’ tax-exempt contributions.

Get Your Complimentary Guide to Solo 401(k) plans

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How to Claim the Solo 401(k) Contribution for Pass-Through Businesses

If your business is a pass-through structure like a sole proprietorship, LLC, or partnership:

  • Submit both contributions to the IRS on your personal tax return, form 1040.
  • Calculate your earned income from the business using Schedule C.
  • Report the total employer and employee contribution on line 15 of Schedule 1.
  • Subtract the employer contribution from your taxable income to report adjusted income on line 8a of Schedule 1.

How to Claim the Solo 401(k) Contribution for S-Corps

If your business of one is classified as a corporation, business income and contributions are calculated as a separate entity, independent from your personal income tax return. However, S-corps receive special treatment, as business income may pass through to owners and shareholders.

You will need to file an additional tax return for your business in this case, but you enjoy freedom from any other “corporate tax” obligations.

  • Fill out your S-corp information using Form 1120-S.
  • List your Solo 401(k) employer contribution on line 23.
  • You will also need to fill out Form 5500 or 5500-SF if your account balance is over $250,000.
  • And, on a personal level, you will need to fill out the employee contribution on box 12 of your W2.

Keep in mind: your salary-reducing portion of the Solo 401(k) contribution has already been deducted from your taxable amount in box 1 of your W2.

What If You Have a Roth?

Roth contributions are after-tax, so they won’t be listed on your personal or business tax returns. While you aren’t claiming a deduction anywhere for the money put into your account, you will enjoy tax savings upon retirement as you’re taking the money out.

Have Questions About Claiming a Solo 401(k) Contribution Deduction?

As your 401(k) plan provider, we are always happy to assist our Solo 401(k) contributors at tax time. Use our convenient Solo 401(k) calculator, or contact our on-staff accountants to ensure you meet all necessary filing requirements and fully understand the unique advantages of a Solo 401(k). Contact Ubiquity to learn more.

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2020 Solo 401(k) Contribution Deadline

Dylan Telerski / 9 Nov 2020 / Business

deadline calendar

There is a new Solo 401(k) contribution deadline for 2020. Previously, you would have had until December 31, 2020, to establish your Solo 401(k) plan, which would allow you until April 15, 2021 (the Tax Filing Deadline) to make contributions. Now, you have until April 15, 2021, to get a new Solo 401(k) account opened for 2020 and make contributions.

New Solo 401(k) Setup for the Year 2020 is Due 4/15/21

Your business must adopt a new Solo 401(k) by April 15, 2021, in order to make 2020 contributions. If you haven’t adopted a Solo 401(k) yet, you should start now so your documents will be completed, and you can spread out your contributions over the next six months. After all, you can contribute 100% of your wages up to a maximum of $19,500 as an “employee” — or to a maximum of $26,000 if you’re over 50.

As “employer,” you can set aside an additional 25% of the business entity’s income (to a maximum of $57,000) as a profit-sharing contribution. If you have a spouse working for the business, the same allowances may be made on his or her behalf to maximize your household retirement savings.

Get Your Complimentary Guide to Solo 401(k) plans

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Deadline Extended for Existing Solo 401(k)s

If you had a single-member LLC or C-corp Solo 401(k) in 2019, the contribution deadline was April 15, 2020. If you had an S-corp or partnership LLC, the deadline was March 15, 2020. Both of these deadlines could be extended another six months (until September or October 2020) by filing an extension request. This is a huge benefit for people who want to make 2019 contributions but won’t have the funds available until later in the year.

What You Should Be Doing Now to Prepare

Even though employer and employee contributions can be extended until the company tax return deadline, you will still need to file a W2 for your “employee” wages by January 31, 2021. This W2 details your wages and deductions for employee retirement plan contributions in box 12. At the very least, you should determine the amount you plan to contribute by this deadline.

Solo 401(k) Contributions Example

Here’s an example of how Solo 401(k) contributions might work out:

Josephine is 33 years old and set up a single-member LLC Solo 401(k) for her Etsy business in 2020. Josephine earned $120,000 in net income for the year — $50,000 in W2 wages and $70,000 in taxable K-1 business profits. She hasn’t made her contributions yet, but she wants to now to reduce her taxable income for the year and save for retirement. She can max out her 2020 Solo 401(k) contribution limit by:

  • Contributing as an Employee

    Josephine plans to save $19,500 by the tax filing deadline of April 15, 2021, which will reduce her W2 taxable income from $50,000 to $30,500. Assuming she is in a 20% federal tax bracket and a 5% state tax bracket, she’d save $4,450 in tax liability for the year AND setup a considerable nest egg that will compound interest for the next 30+ years. Way to go, Josephine!

  • Contributing as an Employer

    Josephine can save up to 25% of wage compensation not to exceed $57,000 as an employer profit sharing contribution. Since Josephine has taken a W2 wage of $50,000, the company can make a 25% contribution of $12,500. The company lists this employee benefit expense on the S-Corp tax return (Form 1120S). If Josephine contributes $12,500, she will report $57,500 instead of $70,000 in net profit on her K-1 form. Assuming the same tax brackets, she would save $3,125 in tax liability as an employer, so long as she made the contributions by April 15, 2021 – the company tax return deadline. If she files an extension, she can have until October 15, 2021.

All considered, Josephine contributed $32,000 for retirement ($19,500 as employee, $12,500 as employer) and paid $7,575 less in federal and state taxes. That’s a pretty great deal!
If you’d like to maximize your savings, then now is the ideal time to begin coordinating with your accountant and 401(k) plan provider.

Ubiquity is happy to help you set up a new Solo 401(k). We’ve offered a low, flat monthly fee since 1999.

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Best 401k for the Self-Employed

Dylan Telerski / 5 Nov 2020 / Business

Self-employed man working from home and learning about the benefits of a solo 401k

By the end of 2020, there could be 42 million self-employed Americans – accounting for roughly a third of all working professionals.

One of the potential pitfalls of working for yourself is that you don’t have anyone looking over your shoulder to ensure you save for your retirement. It’s all up to you to figure out on your own. Fortunately, the Solo 401k is an excellent option for self-employed workers to build their future retirement nest egg and save on their tax obligations today.

Solo 401k: The Best 401k for Self-employed Workers

Ubiquity recommends a Solo 401k, whether you’re a self-employed entrepreneur or a business owner with no full-time, regular employees. Here is everything you need to know about this great savings opportunity:

  • Who is eligible:

    A self-employed worker or business owner can set up a Solo 401k, so long as there are no “full-time, regular employees.” You can have 1099 freelancers, part-time workers with under 1,000 hours, nonresident aliens, and children under 21 working for you. A spouse working for the business can also participate in your Solo 401k plan to double the household savings amount.

  • How much you can save:

    You’re allowed to set aside up to 100% of your income, to a maximum of $57,000, as an “employee” in 2020. A $6,000 catchup contribution is allowed for those over 50. In your capacity as an “employer” (of yourself), you can contribute up to 25% of net self-employment income (net profit – half your self-employment tax + plan contributions you made for yourself). The maximum employer + employee total for 2020 is $285,000. If your spouse is in the plan, you can double this figure. You may also elect not to make any contributions if finances are tight this year.

  • Tax advantage:

    A Solo 401k works like any employer-offered 401k with pre-tax contributions. Distributions can be taken without penalty after age 59.5 and must be taken at age 70.5 – at which point taxes are paid on the amounts withdrawn.

Get Your Complimentary Guide to Solo 401(k) plans

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Alternatives to the Solo 401k for Self-Employed Workers

Other retirement savings options for self-employed include:

  • Traditional or Roth IRAs – ideal for those just starting out to save up to $6,000 a year, plus a $1,000 catchup contribution for over 50. Tax deductions are available for traditional IRAs, whereas Roth IRAs allow for tax-free withdrawals in retirement.
  • SEP IRAs – allow up to 25% of self-employment earnings to a maximum of $57,000. This amount can be deducted on a personal tax return. Distributions in retirement are taxed as income. If you have employees, you must contribute an equal percentage of salary for each one.
  • SIMPLE IRAs – are good for larger businesses with up to 100 employees, allowing up to $13,500 in 2020, plus a $3,000 catchup contribution. Money put into the account is deductible, but distributions are taxed in retirement. Employee contributions are deductible as a business expense. You may contribute matching contributions up to 3% or fixed contributions of 2%.
  • Detailed Benefit Plans – are fit for self-employed individuals with no employees who have a high income and want to maximize savings on an ongoing basis. Also called a pension plan, contribution limits are based on the benefit you’ll receive at retirement, your age, and your expected investment returns. These plans are expensive to administer and require ongoing funding commitments. If you need to stash $50,000 to $80,000 more, it makes sense to pursue a pension – but, otherwise, there are better options.

How to Set Up a Solo 401k

You can open a Solo 401k quickly and easily online with Ubiquity. Compared to other types of 401k accounts, a Solo 401k is simpler to administer. Some self-employed business owners tackle their own administrative duties – making contributions, keeping records, and filing tax returns and IRS documents. This approach requires organization, financial knowledge, and assumed liability for keeping your books straight. You may need a broker to help orchestrate specific investments unless you take a DIY approach and trade online.

Another option is to hire a Certified Public Accountant. These professionals charge, on average, over $450 just to help you prepare the annual Form 1040 with Schedule C.

At $18/month, hiring Ubiquity to oversee your plan administration provides much more value for your money. We’ll file your plan documents, inform you of new plan tax credits, and keep up with Form 5500 every year once your account balance exceeds $250,000.

We can automate deductions for you if you wish, keep detailed records of your contributions, monitor your account to make sure that you aren’t depositing too much, facilitate loans, and pay out distributions. Our administration is available for a low flat monthly rate. Connect with a Ubiquity retirement expert to get started.

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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.

Dollar folded like a boat promoting that you can "Keep taxes at bay" with a Safe Harbor 401(k) plan

Deciding to offer employees a 401(k) savings plan is a huge stride toward making your business more competitive and preparing yourself for retirement. But which type of 401(k) is right for you and your enterprise?

A Safe Harbor 401(k) is one popular choice, particularly for small businesses, as it allows you to bypass many of the administrative hassles associated with a Traditional 401(k) – most notably the auditing and annual nondiscrimination testing.

Why Choose a Safe Harbor 401(k) for Your Small Business?

Here are ten reasons that a Safe Harbor 401(k) might be the right choice for your business:

Skip Annual Auditing and Nondiscrimination Testing

Nondiscrimination testing ensures that all employees receive the same fair tax advantages, whether they are highly compensated or rank-and-file members of the organization. Plans that fail testing must be remedied immediately or face substantial penalties and risk having the entire plan balance refunded. If regular employees aren’t putting enough into savings, the highly compensated employees may need portions of their contributions refunded to them. An alternative – though costly – solution would be for the business owner to make increased contributions to regular employees to bring them up to par – thus adding an unexpected and potentially exorbitant expense.

A Safe Harbor 401(k) allows employers to disregard the nondiscrimination checks and balances, so long as they agree to make a guaranteed contribution to all employees. Options include:

  • A Nonelective Contribution worth 3% of every employee’s salary, regardless of participation in the plan
  • A Basic Match worth 100% of the first 3% of employee contributions and 50% match on the next 2%
  • An Enhanced Match worth 100% on 4-6% of employee contributions.

Prepare for Your Own Retirement and Increase Personal 401(k) Savings

Like a Traditional 401(k), a Safe Harbor 401(k) is an ideal way to save for retirement with pre-tax income. In 2020, you can contribute up to $19,000 a year or $25,000 if you’re turning 50 or older this year. A 3% contribution to all employees gives you the freedom to maximize payments for yourself, highly-compensated employees, and key executives, regardless of what others choose to do.

Incentivize Highly-Compensated and Key Employees

A 401(k) Safe Harbor Profit Sharing Plan allows employees to retain control over what they personally set aside for their own retirements, while allowing employers the ability to make vested contributions that will pass nondiscrimination testing even if some employees want to invest to the max. By adding profit-sharing plan contributions, you can adequately reward the company’s most-prized talent up to the individual maximum of $56,000.

Boost Employee Engagement and Benefits Usage

What good is it to offer an employee benefit that no one uses? Lack of participation can be a major problem for small businesses, especially if employees feel the benefits are too costly or difficult to understand. Worse yet, some employees may be uneducated as to the benefits of a 401(k).

Regardless of the reason for low participation rates, you can remedy the situation by choosing automatic enrollment during the Safe Harbor setup. Unless employees specifically opt out, a standard deduction will be put into their retirement accounts.

Making Safe Harbor matches is another way to get employees participating in their own plans. At worst, the 3% nonelective contribution will ensure adequate participation levels to allow you and HCEs the opportunity to maximize savings.

Satisfy and Retain Employees with Mandatory Contributions

The vast majority of modern 401(k) plans include an employer match, so you’ll need one anyway if you want to compete for talent and retain your workers. By opening a Safe Harbor plan, you’re incentivizing employees to remain committed to the company. You’re demonstrating that you are likewise committed to their financial security and wellness, too.

Save Money at Tax-Time

As the employer, you receive additional tax savings for making Safe Harbor contributions. All contributions can be deducted as a “business expense” on your federal income tax return and are free from your payroll tax obligation.

Gobble Up Juicy Tax Credits

New 401(k) plans (regardless of Safe Harbor or not) can be eligible to receive up to $16,500 in small business tax credits over a three-year period to offset administration expenses. The SECURE Act allows employers to write off up to $5,000 per year or 50% of the plan’s startup costs, each year for the first three years. Administrative cost write-offs include plan setup, annual maintenance, and employee education.

Enjoy Maximum Plan Flexibility

No business year is the same. At some point, you may wish to make more or less generous contributions to the plan. Safe Harbor 401(k)s can be amended at any time during the year. You can alter the match formula or remove a Safe Harbor provision entirely with 30 days’ notice. The Safe Harbor can be later reinstated or ramped up, as economic conditions permit.

Reduce Administrative Burdens

A Safe Harbor is not the only way to avoid nondiscrimination rules, but it is the easiest, from an administrative standpoint. While Safe Harbor plans do come with a lot of requirements, they aren’t any harder to administer than Traditional 401(k)s. In fact, plan administration is a lot easier without the time-consuming expense of auditing and testing. At Ubiquity, we are happy to ensure your contributions, notice requirements, and participant disclosures are all on schedule.

Since 1999, Ubiquity has been a low-cost small business 401(k) plan provider with a genuine stake in your company’s success. We are happy to discuss the benefits of a Safe Harbor vs. a Traditional 401(k) and provide you with a Safe Harbor free consultation to explore all your benefits options. When you’re ready, we can have you set up in just a few minutes to start enjoying tax and retirement savings right away.

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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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