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.

How to Recession-Proof Your 401k

Dylan Telerski / 7 May 2020 / 401k Resources

Manage your retirement plan through market volatility

The panic is palpable during a recession. Watching the daily dip in the Dow can be a painful experience for people who are accustomed to checking their stock portfolios daily.

Retirement savers may have heard that they can take out a 401k loan to help them through the crisis. Whether you’re actively involved with your plan or not, the coronavirus downturn represents a good opportunity to recession-proof your 401k.

Focus on what you can control.

What we know over decades of watching the markets through good times and bad is that a long-term focus with regular contributions is the best strategy to grow a retirement nest egg. Resist the urge to make a hasty, knee-jerk reaction and pull your money out. Leave it on autopilot and don’t look at the numbers. It WILL get better!

Make minor changes to benefit your situation.

What if you can’t rely on the long-haul, and you plan to retire within a few years? If you need short-term finances, you can sell some of your investments now. If retirement is still five or more years into the future, you can hold off and expect 10 percent annual returns when the market perks back up again.

Take a closer look at asset allocation. Market timing rarely works, but you should at least make sure your portfolio consists of diversified mutual funds, as well as a mix of stocks and bonds. Consider target-date funds if you are older, as the fund manager will move your assets from riskier stocks to less-risky bonds and money market funds as you get closer to retirement.

Even if you’re a younger investor, you can look at what assets you currently own and rebalance. If you’re overinvested in stocks, add some bonds. If you have invested too heavily in the market, add cash to a money market fund temporarily until it’s a better moment to invest in high-return stocks.

Assess the risk on your individual securities. Look for mutual funds with “growth and income” or “balanced” in the name.

Look for opportunity.

Where some see a market wipe-out, others see opportunity. Many investors are actually upping their contributions during the recession. Elective salary deferrals stretch further when stock prices drop. If you can afford to, contact your plan administrator to adjust the withholding percentage. This money will come out of your paycheck without you realizing it is missing. This strategy makes sense, particularly if you have failed to maximize your employer match; this is free money that will continue to grow for you over the long haul.

As of 2020, contribution limits have increased to $19,500, with an additional $6,500 allowed for those over 50. Take this chance to buy key stocks at relatively low prices to set yourself up for bigger future returns.

Recessions are common to the American economy, cycling every four years and lasting 10 months on average, but stock prices hit new highs after rebounding from each downturn. Hang in there, stay the course, and keep investing. You needn’t rest on your laurels during a recession. Rather, making small, thoughtful adjustments is the best way to right the ship and keep sailing on. Contact Ubiquity to learn more about how to maximize 401k plans during the pandemic.

You have another opportunity to apply for a Paycheck Protection Program (PPP) loan. The initial $350 billion of funding ran out within a matter of weeks. The program reopened Monday, April 27, but the additional money appropriated will not last long either, given the backlog of applications and continued interest in the program.

What makes PPP loans the most attractive option on the market is the fact that you can take out a hefty sum (2.5x your monthly payroll up to $10 million). In addition, you do not have to repay this money, as long as you use the funds for salary, wages, commissions, tips, vacation pay, family leave, and state/local taxes. Continue reading to find out how you can apply.

Choose where to apply for a PPP loan

If you have an existing relationship with a lender, such as a federally-insured bank or credit union, that’s the best place to start. Many national institutions, from Live Oak Bank and JP Morgan Chase to Bank of America and Regents Bank, are only accepting applications from existing customers.

If you do not have an existing relationship with a regional bank or credit union, you may be able to apply through:

  • BlueVine
  • Centerstone SBA Lending
  • Fountainhead
  • Fundera
  • Funding Circle
  • Harvest Small Business Finance
  • Intuit/Quickbooks Capital
  • Kabbage
  • Lendistry
  • OnDeck
  • PayPal
  • Ready Capital
  • Square Capital
  • The Loan Source
  • Velocity SBA

To avoid scams, be sure you’re working through an approved lender. The Small Business Administration’s lender search tool can tell you whether they are one of the 1,800 participating lenders authorized to administer the program. The application deadline is June 30, 2020, if funding does not run out in the meantime.

Fill out a PPP application

You can get the application at your lender’s office or apply online in some cases. The Small Business Administration also lets you download and fill out a PPP form on their website.

The processing time

The program requires lenders to disburse the funds within 10 days of approval, but most small businesses report a one to five-day loan processing time. While you are waiting, you may consider other options like Economic Injury Disaster Loans (EIDL) or 401k loans.

Know the rules for PPP forgiveness

If you are spending your PPP loan on approved expenses, the loan debt will be forgiven.

  • Use all (or at least 75%) of the funds on wages, benefits, tips, commissions, paid leave, and local taxes.
  • Convert 1099 workers to W2 workers for the next eight weeks.
  • Do not pay any one employee (including yourself) over $3,846.15 in a two-week period.
  • Start payments the day you receive the money.
  • Do not lay off workers during the next eight weeks.

Keep in mind any borrowed money that is not forgiven will be converted into a very low-interest loan. Forgiveness will be approved at the end of the eight-week period following receipt of your loan, after you have requested this from your lender in writing. Your request must contain documentation of the number of full-time employees, pay rates, mortgage, or lease payments, as well as utility payments. Your lender has 60 days to reply to your request.

Contact Ubiquity if you have any questions about how the coronavirus crisis affects your 401k retirement savings.

The U.S. Small Business Administration is offering Economic Injury Disaster Loans (EIDL) worth up to $2 million. The goal is to support small businesses in overcoming temporary loss of revenue.

Keep in mind the loans, cash advances, and grants are only available as federal appropriations are made. Once the funding runs out, applications will no longer be accepted. Since multiple bills have passed already, the situation is extremely fluid, with more money likely to be doled out in the future.

Economic Injury Disaster Loans

What It Is: EIDLs provide working capital to meet necessary financial obligations during the disaster period.

How Much Can You Get?: You can take out up to $2 million in disaster assistance.

What Can You Use It For?: EIDLs can be used for essentially any business purpose – payroll, benefits, buying materials, rent, utility payments, and vendor payments. The funds should not be used for expansions, employee bonuses, long-term debt refinancing, or physical property repairs and renovations.

Do You Need To Repay It?: Yes, you will need to repay the EIDL, though you may also qualify to receive $10,000 in grant money while you wait for your loan, which you do not have to repay.

What Is The Term?: Terms last up to 30 years, depending on your ability to repay the loan.

What Is The Interest Rate?: Small businesses are subject to a 3.75% interest rate, while nonprofits receive a 2.75% interest rate.

Economic Injury Disaster Advance Grants

What It Is: Small businesses can receive a cash advance within days of a successful application.

How Much Can You Get?: You can receive up to $10,000 in emergency assistance.

What Can You Use It For?: The funds are meant to recover loss of revenue due to the economic pause.

Do You Need To Repay It?: No! This loan advance does not need to be repaid.

What Is the Term?: There is no term. It’s free money if you are approved!

What Is The Interest Rate?: There is no interest. The $10,000 is yours to keep.

Where to Apply: Apply for the Economic Injury Disaster advance here.

Unable to Get An SBA Disaster Relief Loan?

Getting an SBA disaster relief grant or loan is a great opportunity for small businesses, but it’s not the only option. There are also Paycheck Protection Program loans offering 2.5x monthly payroll expenses, capped at $10 million, that can be completely forgiven as long as employers use the money to keep their workers on the payroll for at least eight weeks. Yet, as you may expect, these funds, available through the U.S. Department of Treasury, are even more in short supply.

The good news is that you may be able to tap into your own savings short-term, thanks to a provision in the CARES Act that lets you borrow up to 100% of your 401k savings. Usually, you are only able to borrow 50%, so this is a good opportunity if you cannot access funds by any other means. You will be able to put the money back in, with no cap on the annual amount added, over the next five years.

The repayment term can be delayed for up to a year. If you can’t repay the loan, your outstanding balance will be taxed like a withdrawal, and you’ll need to pay a 10% early withdrawal penalty, so you want to make sure you don’t take out more than you can handle over a five-year period.

Contact Ubiquity if you have questions about a 401k loan, setting up a new 401k program, or keeping your retirement on-track during the coronavirus crisis.

While supermarkets, pharmacies, and streaming services are thriving, the reality on Main Street is very different. Small business owners are used to operating under tight margins–as long as they are allowed to remain open and bring in revenue.

The federal government understands that small businesses are the lifeblood of America, which is why both Democrats and Republicans worked together to pass the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Federal and state aid have lowered barriers to obtaining funding to ensure that more businesses have the opportunity to survive the crisis. They may apply for a PPP loan, EIDL loan, and EIDL grant under the program. The EIDL may be rolled over into a PPP if approved, allowing you the ability to potentially forgive some of the debt and decrease the interest rate to 1%.

Keep reading to learn how to apply for small business relief.

How to get a small business coronavirus loan or grant

Find out if you qualify for a Paycheck Protection Program loan through the U.S. Treasury Department.

  • Your business should have 500 or fewer employees, though there may be a few exceptions.
  • Sole proprietorships, independent contractors, and self-employed individuals may apply.
  • You need not try to get funding elsewhere before applying to the program.
  • Businesses in food or hospitality industries may be eligible, depending on their location.
  • Your business must have been established as of February 15, 2020.
  • To have your loan forgiven, you must use the PPP loan for payroll expenses, rent, and utilities.

Find out if you qualify for an Economic Injury Disaster Loan or grant through the U.S. SBA.

  • Your small, cooperative, private nonprofit, agricultural, or tribal business has under 500 employees.
  • Sole proprietorships, independent contractors, and the self-employed may qualify.
  • Your business must have been established by January 31, 2020.
  • Your business was directly affected by coronavirus in some way.
  • Applicants are judged based on their credit history and ability to repay.
  • A personal credit check is required for owners with a 20% or greater stake in the company.

Collect your required documents.

  • For PPP loans, businesses will need to submit: A front/back color copy of a valid driver’s license for each owner; 941 quarterly tax filings (2019, 2020 Q1), 944 annual tax filings (2019), payroll register for the past 12 months, and 12 months of most recent bank statements. Contractors or self-employed individuals need: IRS 1040 Schedule C, 1099s (2019), income and expense reports (2019), and any other document proving payroll expenses.
  • For EIDL, all business owners with a 20% or more stake in the company must submit: loan applications, tax information authorization (IRS Form 4506-T), federal income tax returns, personal financial statement (SBA Form 413), and a schedule of liabilities listing all fixed debts.

Submit your paperwork.

Time frame

  • You will receive PPP loan funding within 10 days of approval. You can check the status via Lendio.
  • It can take 21 days or more for EIDL approval, but you may get your $10K cash advance in 3 days.

How to get money for your small business when loan and grant money runs out

The process of trying to get a small business coronavirus loan or grant is not easy. Even though the lending requirements and documentation have been considerably reduced, thousands of businesses are also applying for that finite pool of money.

If you are worried about how your small business might survive the COVID-19 crisis, consider speaking to a financial advisor. Together you can strategize about how your current resources can be most effectively used during this downtime.

The government’s coronavirus economic support package also includes business interruption insurance, paid sick leave, a tax deadline extension, and favorable 401k loan terms as other options to make your money stretch.

Contact Ubiquity if you have questions about how making changes to your company’s retirement plan can free up capital.

Thanks to the CARES Act, it’s easier than ever for your employees to pull money out of their 401k. You’ll likely be fielding a lot of phone calls with plan participants wondering if they can access this cash to get by during the global pandemic. Whether or not employees have access to their retirement accounts early is up to you.

CARES Act Lifts Restrictions on 401k Loans

The CARES Act offers relief by loosening restrictions on 401k loans and distributions by:

  • Penalty-free distributions allowed – Qualified participants (diagnosed with COVID-19, caring for a spouse or dependent with COVID-19, or otherwise laid off/furloughed/unable to work) can take out up to $100,000 without paying the 10% excise tax for early withdrawal. The distribution is not taxed if repaid within three years.
  • Bigger plan loans allowed – In the past, plan participants could take out up to 50% of their account balances (up to $50,000). Now, qualified participants can take out 100% of their balances (up to $100,000). There is no 10% “early withdrawal” penalty for participants who are under 59.5 years of age. Loan repayment can be suspended until December 31, 2020. Interest continues to accrue, but participants can take up to five years to pay off their loans.
  • No required minimum distributions – RMDs for those age 72 or over can be waived for the remainder of 2020 to avoid selling at undervalued prices.
  • New parents can take money out – Americans who just had a baby or adopted a child can take up to $5,000 from a 401k or IRA without the typical 10% penalty. Feasibly, if they have separate retirement accounts, a couple could take up to $10,000 in total. New parents may opt to repay, but the borrowed cash does not have strict repayment protocols in place.

Note that all of these provisions have been approved by the IRS, but are optional for employers to incorporate into their plans. Some plan recordkeepers have started proactively implementing the changes, allowing employers a brief opt-out period. Now is a good time to discuss the CARES Act provisions with your plan provider if you haven’t already.

Not All Employees Can Take 401k Withdrawals

The IRS generally mandates that employees leave their money in a 401k account until reaching age 59.5, become permanently disabled, suffer a specific financial hardship, the plan dissolves, or the worker leaves the company. People who have met these conditions can take funds out of the 401k, though the approved amount may vary.

In some cases, employees can be refused if:

  • The employee has not saved enough to take out yet. While rules allow employees to take up to $100,000 in a loan, most young Americans have far less than that in their accounts. The average American age 56 to 61 has $21,000 in a 401k account. Millennials from 32 to 37 have an average of $1,000 accessible in their 401ks.
  • The plan requires employees to first become “vested” after a certain number of years before they can access the funds put into the account.
  • The employee is under 59.5 years of age. A 10% early withdrawal penalty may apply.
  • The employee does not meet hardship requirements. The IRS allows money to be taken out of a 401k to cover medical expenses, funeral bills, college tuition, health insurance premiums, down-payments on a starter home, to avoid eviction or foreclosure, to pay court-ordered alimony or child support, or to cover expenses related to “a federal disaster.”

Borrowing from a 401k Should Be a Last Resort

Economists recommend tapping a 401k as a last resort. Why?

  • A 10% penalty applies if the money is withdrawn early for any reason aside from an approved hardship.
  • Consumers have to pull out a larger percentage of assets, as they are worth less during a downturn.
  • There will be no compounding during the withdrawal period (which is typically about 7% per year.)
  • The amounts saved during the first 10 years of investing can account for 50% of the balance by age 65.
  • Income taxes will still be owed on withdrawals from traditional 401k deferrals and employer matching.

The ideal scenario would be to tap emergency cash savings. Americans are advised to keep at least three to six months of expenses in a cash savings account for emergencies. Homeowners may consider taking a low-interest line of credit. Personal loans from a local credit union can help consolidate debt or make a big purchase, though the interest rate can be 10% or higher.

We’ve only just skimmed the surface of the questions you may face here. Call us for more personalized financial advice about starting, changing, or updating your 401k plan. Ubiquity specializes in working with small businesses.

Although the law does not allow employers to directly advise employees on how to invest their retirement funds, the Department of Labor does encourage employers to provide access to an independent provider.

More employers started choosing 401k providers who go the extra mile in employee education, and are regularly reviewing plan offerings to see that workers have a diverse set of options.

Nearly half of all employers offer access to investment advice, according to The Plan Sponsor Council of America.

Use your investment policy statement.

An investment policy statement defines why and how investments are selected. It’s important to have this document on hand in order to run the plan responsibly. These days, employers are not just tapping their resources to design plans that they can “set and forget.” Now they are actively reviewing and evaluating funds. After all, employers don’t want to be the ones on the hook for poor portfolio performance. Circulate a copy of your Employee Education Policy Statement, so people know where to go for more information when they need it.

Choose funds wisely.

If a particular employee asks about adding a particular fund, you want to show that you’re actively listening. Yet, you don’t want to immediately add funds without first considering whether it’s appropriate for the plan. Overstuffing plans with funds – the average number is about 15 – can leave employees saturated with a plethora of options they can’t sort through. Fewer, better choices with broad parameters offer the best path to solid asset allocation.

Personalize financial wellness education.

Most people don’t want to spend more than 20 minutes a month learning how to maximize their 401k plans. No one wants to read through boring brochures, but if the content is personalized and presented in a fun way, people will engage. For instance, Ubiquity has partnered with Edukate to offer plan participants personalized guides, contests, assessments, and video courses that are as fun as taking a Facebook quiz.

Correct widespread misperceptions.

Plan sponsor education sessions should focus on correcting common misperceptions. For instance, many plan participants erroneously believe:

  • “I should stop contributing to my 401k when the stock market falls to avoid losing everything.”
  • “If I need money, I can just take a loan out of my 401k, no problem.”
  • “I only need to contribute enough to receive the employer match.”
  • “Money market funds are the best place to invest.”
  • “I should allocate more of my balance to the funds that are performing the best.”
  • “Company stock is the safest place to park my money.”

Simply dispelling the myths is a big achievement. Make these information sessions paid and mandatory.

Keep an eye on the stragglers.

Sponsors should devote considerable attention to ensuring that plan participants know how to receive the maximum company match. Most 401k plans have a sizable population that does not contribute enough to reach maximum value. Send out special mailings to all participants who are not maxing out. Offer 30-minute, one-on-one education sessions with plan sponsors.

If nothing else, employers are in a position to preach patience.

Remember, you have the most captive audience at enrollment. If nothing else, preach patience. Explain that the 401k is a long-term investment designed to provide for one’s retirement. As an employer, you can shed clarity on the investment process and instill confidence with charts that show long-term market recoveries.

The best approach is to avoid immediate, rash action and to make smaller tweaks along the way. Rather than move fully to bonds, consider a halfway jump to see what happens. Rather than stopping contributions during a downturn, shift them or scale back slightly.

The first 10 years of investing in a portfolio can account for up to 50% of the total balance after age 65, so it’s important to resist the urge to pull money out with loans early on.

Employee education can be an uphill battle, but you are already ahead of the curve by offering your workers a retirement savings plan. Contact Ubiquity to learn more about what we can do to help make sure all plan participants are receiving maximum value from their plans.

Employers who take care of their workers throughout the coronavirus crisis will be poised to pick up right where they left off. You have a number of options to provide assistance as a 401k sponsor. You may not have considered allowing 401k hardship withdrawals or 401k loans, but there are incentives for doing so.

Employees can take hardship withdrawals from their 401k plan accounts to meet “an immediate and heavy financial need” related to the coronavirus crisis. You will need to work with your 401k vendor to administer the withdrawals. Of course, a flood of plan participant requests can become a major headache, so it’s best to know the following:

Multiple options to choose from

You do not have to allow both 401k loans and 401k hardship withdrawals under your plan.

Most 401k plans have incorporated CARES Act changes. For instance, loans can now be made up to $100,000 (or 100% of the account balance) – double the usual limit. Participants can extend repayment terms on existing 401k loans for an extra year, with no payments due in 2020. Up to $100,000 can be taken out of a retirement account before age 59.5 – without the 10% early withdrawal penalty – if the plan participant has been directly affected by the COVID-19 pandemic.

Loans must generally be repaid within five years at a varying interest rate; if the loan is not repaid in full, participants must take the remainder as a rollover distribution and pay the 10% early withdrawal penalty, if applicable.

Almost 165,000 Americans took hardship withdrawals out of their 401ks in the month of April. Normally, there are about 220,000 withdrawals in a quarter. Most people take out $5,500, but 3,200 people took out the $100,000 maximum now allowed under the CARES Act that passed on March 27. Hardship withdrawals do not need to be repaid, but the amount taken is subject to income tax and a 10% penalty if the plan participant is under 59.5 years old.

Be sure to communicate exactly what the plan offers, including the terms for taking out a loan or hardship withdrawal.

The criteria for hardship is broadening, but you need to be audit-ready.

Hardship criteria include expenses for medical care, the cost of purchasing a principal residence, payment to avoid eviction or foreclosure, payment of college tuition, burial/funeral expenses, emergency home repair costs, or “expenses and losses caused by federally declared disaster.”

Let plan participants know which documents they might submit to ensure the approval of their hardship withdrawal. For instance, submitting a letter from the landlord threatening eviction is helpful to have on file. The IRS may ask to see documentation of the hardship request, review process, approval, and Form 1099-R distribution.

Consider tools that give employees more control.

A survey conducted by the National Association of Plan Advisors found that plan participants were most frustrated in wondering, “It’s my money – why can’t I have it?” Plan sponsors with high rates of participant loan and withdrawal activity can benefit from offering employees educational resources and financial wellness tools. Training employees to budget wisely and save more for their retirements will reduce the administrative burden considerably, while also showing employees you care.

Ubiquity Retirement and Savings is a 401k plan provider in the United States, which provides flat-fee brokerage services and in-depth assistance to small businesses in particular. Switching your 401k provider can save you money and hassle at a time when you need it most. Contact us for details.

President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27, 2020. Part of the bipartisan spending bill throws a lifeline to small businesses looking to remain afloat during the economic freefall caused by the COVID-19 pandemic.

Expanded Unemployment Insurance

Federal unemployment insurance adds $600 a week of benefits on top of whatever states are giving furloughed employees. These benefits last up to four months if necessary. Independent contractors, gig economy workers, freelancers, the self-employed, and those with limited work history are able to apply. So, as a small business owner, you can potentially qualify for unemployment insurance benefits if you pay yourself a salary or wages in addition to receiving dividends. Once workers run out of state benefits, the federal government will fund an additional 13 weeks of unemployment benefits through December 31, 2020.

Payroll Protection

Paycheck Protection Program loans, also called “PPP loans,” are meant to help businesses with fewer than 500 employees retain their workers and cover overhead expenses from February 15 through June 30. Small businesses can take out 2.5x the monthly payroll (up to $10 million) to cover any employees making up to $100,000 per year. Loans may be forgiven if the company retains at least 75 percent of its workforce, and uses the loan for payroll, mortgage interest, rent, utilities, and regional taxes.

Taxpayer Rebates

The CARES Act gives taxpayers up to $1,200 (plus $500 for each child under 17). Taxpayer refunds may not directly impact small businesses, but feasibly some of the money could end up cycling back for purchases. For instance, a quarter of Americans planned to spend their money on food and groceries, so CPG brands, meal kit providers, and restaurants stand to benefit. Nearly a third of Americans are saving their stimulus money – feasibly to spend it once the economy reopens.

Student Loan Debt Tax Deductions

Employer payments on behalf of employee student loans are excluded from taxable income. Employers can contribute up to $5,250 annually toward student loans, with payments excluded from employer and employee taxable income.

Business Tax Provisions

Employers enjoy a number of new tax provisions allowed under the CARES Act this year, including:

  • A 50 percent refundable tax credit on wages paid up to $10,000.
  • Social security payroll tax payments delayed until December 31, 2021, and December 31, 2022.
  • Carrying back net operating losses earned in 2018, 2019, or 2020 five years to offset taxable income.
  • Deducting 50 percent of Earnings Before Interest, Tax, Depreciation, and Amortization (up from 30%).

Stabilization Funds

The U.S. Treasury’s Exchange Stabilization Fund provides $454 billion in emergency lending to businesses, cities, and states. Companies taking out loans must avoid stock buybacks for the entire term of the loan and a year after, and must retain at least 90 percent of its workforce.

Retirement Account Changes

The CARES Act also waives the 10 percent early withdrawal penalty on 401k and IRA distributions. Plan participants looking to take out a 401k loan can take out up to 100% of what they put in and repay themselves over the next five years. Required Minimum Distributions are waived for the rest of 2020, allowing retirees the ability to hold onto funds rather than sell at a discount.

Ubiquity is a low-cost provider of 401k plans. We are committed to helping Americans maximize their retirement accounts in light of the circumstances. Contact us to discuss the CARES Act and more.

Retirement Plans for Individuals

Dylan Telerski / 6 May 2020 / Business

Frenchie dog by owner african american man working on laptop looking for retirement plans

Many Americans tend to live for just today. While “Carpe Diem” sounds good in theory, this ethos can interfere with your quality of life in the long run, after years of spending with reckless abandon catch up with you. And too many Americans have NO retirement savings nest egg whatsoever.

This is a troubling fact, considering social security will only cover an estimated 40 percent of one’s pre-retirement income. Even if you have paid off your mortgage and anticipate significant savings with the elimination of your daily commute, your cost of living will continue. Utilities, home maintenance costs, property taxes, healthcare, vacation, and entertainment costs will persist. Most people need at least 80 percent of their pre-retirement income to live comfortably, so where will the other 40 percent come from?

Maybe you work for yourself, or your employer simply doesn’t offer a plan. Either way, you have options. Now is as good a time as any to start thinking seriously about individual retirement savings. Retirement plans for individuals include the solo 401k, traditional IRA, SEP IRA, and Roth IRA.

What is a Solo 401k?

The Solo 401k operates like a typical 401k but is open to owner-only “businesses.” The business establishing the Solo 401k can be structured as a sole proprietorship, partnership, or corporation.

Who can open a Solo 401k?

One-participant plans are designed for “businesses” with no other employees or with employees who are not eligible to participate in an employer-sponsored program, such as those who work less than 1,000 hours per year or who are younger than 21. To qualify for a Solo 401k, you must have earned some type of income from self-employment. You may work full-time for an employer and have a side hustle. Any income from your side business would then be eligible to enter into a solo 401k plan.

What are the benefits of a Solo 401k?

One of the main benefits of a Solo 401k is the amount you contribute to the plan. Consider this comparison with a Traditional Individual Retirement Account (IRA): In 2019, individuals could only contribute up to $6,000 into an IRA, while a Solo 401k allowed contributions up to $56,000. Individuals over the age of 50 were permitted $1,000 in catch-up contributions to an IRA. Solo 401k plans authorized an additional $6,000.

Other Solo 401k advantages include:

  • Pre-tax salary contributions that will reduce your taxable income.
  • Ability to maximize savings with additional after-tax Roth contributions.
  • Write off any plan contributions and expenses as a business tax deduction.
  • Enjoy pre-tax growth on your investments while in the plan.
  • Retain the option to borrow a loan from your retirement savings if necessary.

Since there are no employees, plan administration is exceptionally low-maintenance. You don’t have to worry about nondiscrimination tests or annual reports with the IRS unless or until your plan reaches $250,000 in assets.

What is a Traditional IRA?

Unlike a 401k plan that must be opened by an employer, anyone with taxable income (or who has a spouse with earned income) can open an IRA. A Traditional IRA is a long-term retirement savings vehicle that allows you to defer taxes on the earnings and growth of your savings until you reach at least 59.5 years of age. If you try to dip in early, you will be subject to a 10 percent early distribution penalty payable to the IRS. You will also have to pay taxes on the amount of the withdrawal at your current income tax rate. Traditional IRA distributions are not required until after 70.5 years of age.

Who can open a Traditional IRA?

Nearly anyone can contribute to a traditional IRA. You need only receive taxable income. Before 2020, you had to be under 70.5 years of age to contribute to a traditional IRA. However, now there is no age limit on making regular contributions to Traditional IRAs.

What are the benefits of a Traditional IRA?

Traditional IRA plans allow savers to deduct contributions from their taxable income. No taxes are paid on interest or gains, while the savings continue to grow year after year. Taxes are due at the time of withdrawal, at your retirement income rate – which should be substantially less in retirement than it is now while you are working.

A traditional IRA is particularly beneficial in the following ways:

  • An IRA is an investment account, so instead of earning a meager 0.5 – 2.5 percent annual interest in a high-yield savings account, your contributions can be invested in mutual funds, bonds, or index funds to achieve higher returns.
  • Traditional IRA accounts are tax shelters, so gains, dividends, and interest are all non-taxable. Your money can grow considerably over the years. IRAs are a great way to save for the future, even if your employer does not offer a matched savings plan.
  • An IRA can be opened in addition to an existing 401k to maximize your savings.

In 2020, individuals under 50 can contribute up to $6,000. Catch-up contributions for older investors of $1,000 are allowed. In addition to depositing annual contributions, IRA savers can fund their IRA account with benefits rolled over from a former employer’s retirement plan or another IRA.

What is a SEP IRA?

A Simplified Employee Pension (SEP IRA) is a variation on a traditional IRA that is especially well-suited to sole proprietors and business owners looking to cover one or more employees. Employees do not contribute to their own accounts. Instead, employers make tax-deductible contributions on behalf of all eligible employees.

Who can open a SEP IRA?

Any business owner with one or more employees can open a SEP IRA. Anyone with freelance income can contribute. To be eligible, employees must be at least 21 years old and have worked for the company in three of the last five years, receiving at least $600 in compensation during the year.

What are the benefits of a SEP IRA?

SEP IRA contribution limits are much higher than a Traditional IRA – more like a Solo 401k. Individuals can contribute up to 25 percent of their net earnings (annual profits minus half of one’s self-employment taxes), up to $57,000 in 2020.

Other advantages of the SEP IRA include:

  • Administrative costs are relatively low.
  • There is no annual funding requirement.
  • Employers have control over how much to contribute annually.
  • The plan offers flexibility to vary contributions, skipping years, or adding end-of-year lump sums.

The SEP IRA is also renowned as the most manageable plan for an individual to establish and operate.

What is a Roth IRA?

A Roth IRA is a retirement savings vehicle that allows you to withdraw your savings and distributions tax-free. Unlike a Traditional IRA, contributions to your retirement plan are not tax-deductible at the time of deposit, but the earnings on your Roth contributions still grow tax-free. If you play by the rules, you can take out the money at the age of retirement without paying federal taxes on it.

A “qualified” withdrawal occurs under any of these circumstances:

  • At least five years after you have opened your Roth IRA,
  • When you are 59.5 or older,
  • Due to a permanent disability,
  • By a beneficiary of your estate after your death, or
  • To buy/rebuild your first home.

But remember, there is still a 10% IRS penalty if you withdraw funds before age 59.5.

Who can open a Roth IRA?

You can contribute to a Roth IRA whether you are married, filing separately, single, or filing as head of the household – as long as your modified adjusted gross income is less than $139,000. If you are married and filing jointly, you can contribute to a Roth IRA if your income is less than $206,000. To avoid reductions in contribution amounts, you will need to make less than $124,000 (separate) or $196,000 (joint).

What are the benefits of a Roth IRA?

Roth IRAs offer certain freedoms that most other retirement savings vehicles do not. For instance:

  • There is no minimum distribution requirement, so you are not forced to take distributions from your account at a certain age. If you wish, you can even leave IRA money to your heirs.
  • There is also no age limit for making contributions, making it an excellent option for older folks who continue to work into their golden years.
  • Since you have already paid taxes on your contributions, you can withdraw them without tax or penalty.
  • Tax-free distributions are allowed once you reach age 59.5 and have had your IRA for at least five years.

Individuals can also make a Roth IRA contribution for a non-working spouse who has no earned income.

Let Ubiquity Help You Decide Which Individual Retirement Plan is Right for You

With so many options for individual retirement plans, there is much to consider when settling on the best choice for you. Let us help guide you on the path that will yield the greatest benefits for your future. Contact Ubiquity and take those first steps today!

Small business owner finding the right retirement plan

It is commonplace for small business owners to forgo setting up retirement plans for their employees. These proprietors list myriad reasons for this, including the perceived expense, limited administrative resources, and lack of employee interest. However, this trend is changing.

Plan providers who tailor their offerings to small business clientele make it easy to get started saving for retirement and saving at tax time, without worrying about AUM fees or employee education. Ubiquity is such a plan provider. Contact us when you are ready and let us help you get started.

In the meantime, please read on to learn more about your various options. There are three main types of retirement plans popular with small business owners: SEP, SIMPLE IRA, and 401k. Understanding the benefits available under each type of program will lead you to the best fit for your company.

SEP IRA Plan

SEP IRA stands for Simplified Employee Pension Individual Retirement Account. Among the plans’ many virtues, they are considered some of the easiest to establish and operate.

What is a SEP IRA?

The essential advantage of the SEP IRA is its high annual maximum contribution limit. Like a traditional IRA, taxes are deferred until withdrawals are made, allowing for compound interest. As of 2020, you may contribute up to 25% of your (or an employee’s) net earnings to a $57,000 maximum. Traditional IRAs only allow you to contribute $5,500/year, so the ability to save is much higher under the SEP IRA structure

Employees do not contribute to the SEP IRA; instead, employers make all the contributions. Contributions may be made in a lump sum at the end of the year or skipped for a year altogether. The employer may decide from year to year whether to contribute and how much to contribute. SEP contributions are deposited into eligible employees’ traditional IRAs.

Who is a SEP IRA best for?

  • Sole proprietors – Its simplicity and flexibility make the plan most desirable for the self-employed.
  • Businesses with few employees – Given the contribution rules, it is best if you have few workers.

Are there any caveats to a SEP IRA?

  • If you have people working for you, all eligible employees must be covered equally.
  • Eligible employees are 21 who have worked 3 of the last five years. Employment may be seasonal or part-time.
  • SEP IRAs are easy, but they are not necessarily the most effective means of saving for retirement.

How might a SEP IRA work?

Let’s use the example of “Fred,” a sole proprietor of a small business who establishes a SEP IRA to save for his retirement. He likes the SEP IRA because its flexibility allows him to contribute larger contributions during good times and reduce or skip them during downtimes.

In the first few years of running his business, Fred earned $100,000 and contributed $5,500 to his SEP IRA, similar to what he would have contributed to a traditional IRA. However, in his blowout third year, Fred earns $300,000 and adds the maximum contribution of $57,000, without impact on his lifestyle. A traditional IRA would have only allowed him to set aside $16,500 in those three years, versus $68,000 with the SEP IRA model.

Fred’s business continues to thrive for the next 20 years, and every year he adds the maximum $57,000 to his retirement account. He receives annual returns of 7% and has over $1.4 million in savings. With a traditional IRA, he would have only saved $117,700. As Fred grows his empire, he hires a few employees. The financial institution trustee for the SEP offers several investment funds from which Fred and his employees can choose. Employees can divide their employer’s contributions to their individual retirement accounts as they wish.

SIMPLE IRA Plan

SIMPLE stands for Savings Incentive Match Plan for Employees of Small Employers. Only businesses with 100 or fewer employees may establish a SIMPLE IRA plan.

What is a SIMPLE IRA?

The SIMPLE IRA works like a 401k plan, allowing employee and employer contributions. One distinct advantage of SIMPLE IRAs is that employer contributions vest immediately. Eligibility requirements are low.

Unlike a 401k, employers are not subject to complex nondiscrimination testing. Investment options tend to outnumber 401k offerings. The SIMPLE IRA delivers on its name, as it is considered easier to set up and administrate than other plans.

For 2020, the maximum annual contribution limit is $13,500, with $3,000 in catchups allowed. Mandatory employer contributions may be 2% flat ($285K maximum cap) or up to 3% if employees participate. As with other Individual Retirement Accounts, taxes are deferred, allowing savings to compound.

Who is a SIMPLE IRA best for?

  • A SIMPLE IRA is ideal for businesses with under 100 employees looking for a 401k alternative.
  • A SIMPLE IRA is ideal for employees who want “free employer money,” even if they do not personally contribute.
  • A SIMPLE IRA plan would not be appropriate for a self-employed individual with no employees

Are there any caveats to a SIMPLE IRA?

  • Contribution limits are lower – by $6,000 with a 401k and $43,500 for a SEP IRA or Solo 401k.
  • There is no “Roth” SIMPLE IRA, meaning you cannot pay taxes upfront to avoid them in retirement.
  • You cannot take a loan out of your SIMPLE IRA, should you run into financial trouble.
  • Steep tax penalties apply – 25% within the first two years and 10% thereafter.
  • SIMPLE IRAs are not rollover-friendly and subject to a 25% penalty

How might a SIMPLE IRA work

Let’s use the example of “Jessica.” Jessica runs a successful business with 50 employees. She sets up a SIMPLE IRA with dollar-for-dollar matching up to 3% of each eligible employee’s compensation. Employees who do not participate do not receive any employer match.

Daniel works for Jessica’s company earning $50,000/year, contributing 5% of his compensation ($2,500) to a SIMPLE IRA. Jessica matches his contributions to the maximum amount of 3% ($1,500). The total contribution to Daniel’s retirement account for the year is $4,000.

The SIMPLE IRA offers several investment choices for which employees may choose whatever suits them best. In setting up the plan, Jessica could have also selected a program offering a 2% nonelective contribution; under that option, she could have put $800 into Daniel’s account, even if Daniel himself set aside nothing.

Small Business 401k Plan

Small business owners can choose from several 401k plans, including a Solo 401k, Safe Harbor 401k, Roth 401k, or Traditional 401k.

What is a Small Business 401k?

A 401k is a savings vehicle that helps business owners and employees save for retirement. With any 401k plan, employees can defer a part of their salary into the retirement plan. Many businesses choose to match a portion of the employee contributions as a benefit of employment.

Like IRAs, a 401k plan allows tax deductions, tax-deferred earnings, and tax credits. A significant advantage of these plans is that they have higher contribution limits than SEP or SIMPLE IRAs. They also provide options to make after-tax contributions (“Roth” contributions) or take out a loan. Typically, 401ks offer the broadest range of investment options.

Who is a Small Business 401k best for?

  • Companies that want to attract top talent and reduce turnover.
  • New businesses with one or more employees who wish to take advantage of the $5,000 tax credit during the first three years.
  • Business owners who want to grow their retirement savings with contributions, compounding interest, dividends, and capital gains. (if the business has no employees then this arrangement would be a considered a “Solo 401k”).

Are there any caveats to the Small Business 401k?

  • Due to the significant savings, you must meet strict IRS guidelines and pass compliance testing annually.
  • You must work with a Third Party Administrator for plan setup, annual reporting, and bookkeeping.
  • You will also need a separate Investment Advisor who monitors the menu of investment options.
  • Compared to the SIMPLE IRA, administrative costs, paperwork volume, and plan fees may be higher.

How does a Small Business 401k work?

Small business 401ks are not just for businesses with hundreds of employees. Consider “Dan” and “Michelle,” a married couple who have launched their own small business.

By the time they are 35 years old, Dan and Michelle have reached salaries of $500,000 per year. They set up an LLC and put $98,000 into their 401k each year, lowering their taxable income from $500,000 to $402,000. As they continue to work, they earn dividends, interest, and capital gains, while reducing their tax liability. Working for another 35 years and making 8% interest, their combined 401k accounts leave them with over $16.8 million for retirement. Now that’s the beauty of investment!

On a smaller scale, Steve works for “Company X,” making $50,000 a year. His employer offers a 401k with matched contributions, so Steve saves 5% of his pay, which amounts to $104.17 from each biweekly check. At tax time, Steve is taxed on $47,500 instead of the $50,000 he earned. By the year’s end, he has saved $2,500 for retirement, but it only cost him $1,875. On top of that, his employer matched dollar-for-dollar, netting him a total of $5,000. Over the next 30 years, Steve’s investments do well at 8%, helping him amass $162,000 in retirement savings.

This is a very modest example, as financial planners recommend that employees reserve 15-20% of their pay for retirement. Yet, you can see how even a small amount of savings can compound over time, particularly when employers match.

Let’s Get Your Small Business on a Retirement Plan

With the budget-friendly, easy-to-use 401k solutions from Ubiquity Retirement + Savings, small business owners can take advantage of all the benefits of a 401k plan. We understand that small business owners rarely have robust HR departments. Ubiquity helps eliminate the headaches and responsibilities that come with setting up and managing your 401k program.

Best of all, we offer a wide range of fund options and charge an industry-low flat fee. In fact, we were one of the first companies to provide a flat fee service with no AUM back when we started in 1999. Feel free to use our digital tools for your education and employee engagement, which is something you will not find with every plan administrator.

We also invite you to contact us online or by phone if you have any questions about retirement plans for small business owners. You’re not just a number to us – entrepreneurs and businesses with less than 500 employees are our bread and butter.

The news headlines may have you feeling financially defensive. It’s natural to feel nervous about 401k contributions, even though the current laws allow 401k contributors to borrow from their plans without penalty. But is your situation dire enough to warrant a reduction in savings for your future?

Signs You May Need to Pause Your 401k Contributions

Conventional wisdom dictates that you treat your retirement fund as a non-negotiable expense. Of course, these are unprecedented times of crisis. If you have no other alternatives and at least half these factors apply to you, a short-term pause may be enough to keep you afloat:

  • Your income dropped, but your expenses didn’t go down. Sit down and look at your current spending and budget. Consider other ways of reducing expenses temporarily.
  • You’re falling deeper into credit card debt. Credit card debt can snowball quickly with high interest rates. If you’re missing minimum payments, the penalties can add substantially onto what you owe. Some financial institutions offer debt relief programs and fee waivers to get you out of the crisis without impacting your 401k.
  • You’re very close to retirement. If you were planning to retire in the very near future, you may not want to add another year or two of work. Check to make sure you’re not overexposed to riskier equity investments. Instead of cutting your contributions, you may consider shifting over to less-risky investment choices like stocks and bonds.
  • Your employer suspended matching contributions. Employer matching makes 401k savings particularly lucrative. If your employer has suspended matching contributions, it’s less expensive to halt your savings in favor of paying down debt with that money instead.
  • You have no emergency fund and are at risk of losing your job outright. If you’re worried about losing your job, skipping a few paychecks’ worth of retirement savings can give you the cash reserves you need to temporarily pay for living expenses, should you suddenly lose your job.

Once you’re in recovery mode, consider doubling down on your contributions to catch up.

Reasons Not to Stop Contributing to Your 401k – And Maybe Ramping Up

Market volatility is troubling, but consider staying the course or even ramping up if:

  • You have plenty of time to retirement. People in their 20s, 30s, 40s, and 50s have plenty of time to see a rebound and recoup any present losses.
  • You are looking to maximize your portfolio. In fact, now might be the perfect time to load up on quality investments at rock bottom prices. Stocks are on sale. Shares are cheap. You may have had your eye on a few different investments, but the acquisition price was too high. Now many prices have come down on investments that can only go back up as the economy recovers.
  • You like the idea of paying less in taxes this year. Remember, retirement savings lowers your tax liability. For most retirement plans, the money put in reduces the amount of income you’re taxed on, allowing your money to grow tax-free as well.
  • You’re spending less. Right now, you are not spending money on tickets for sports, concerts, movies, or museums. There’s no money spent at the bar, shopping for clothes, or vacations. Without all these drains on our cash reserves, the timing has never been better to invest more into your retirement, allowing this money to mature and grow your nest egg.

What to Do If Your Employer Cuts Its 401k Match

During the last financial crisis, over 200 U.S. companies suspended or reduced their 401k matches, affecting 4.9% of all participants. Fortunately, three-quarters of companies reinstated their match within a couple of years.

The consequences can be painful for savers, though; just one year of missing $4,040 in employer match (the average contribution), assuming 7% returns over 30 years would result in $30,753 in lost earnings.

If your employer has cut their 401k match:

  • Focus on damage control first. If you need money to put food on the table or keep a roof over your head, it’s okay to build your emergency cash reserves.
  • If you can, boost your contributions. If your job is secure, consider increasing your contributions to make up for the missing match. You might also consider opening up an IRA in addition to your 401k to take advantage of more investment choices and lower fees.

The Bottom Line

A short-term dip shouldn’t affect your long-term savings goals. That said, it’s worth checking your account periodically to see if you should consider adjusting your strategy to better align with your unique goals and risk tolerance.

There is no substitute for a quick consultation with a professional financial adviser. If you are interested in staying the course and starting or switching a 401k plan for small business, you can count on Ubiquity for affordable plans at a flat, fixed rate, with no AUM fees.

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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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