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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.

COVID has taken its toll on 401(k) retirement plans, with about 8% of businesses (covering approximately more than 46,000 plans) having cut 401(k) contributions since the start of the pandemic.

While small businesses are more likely to have reduced matching or discretionary contributions as a cost-saving measure, the great majority of companies were able to maintain their retirement contributions in 2020.

Contribution Changes

According to the Plan Sponsor Council of America, more than 1 in 10 small business 401(k)s with fewer than 50 participants have made COVID-19 related changes to their matching contributions within the past year. Organizations with over 5,000 participants were 3x more likely to stay the course.

  • Almost 4 percent of 401(k) plans stopped paying a match to workers entirely.
  • 1.5 percent reduced their match.
  • 1 percent eliminated non-matching contributions.
  • 1.5 percent reduced non-matching contributions.

Though many small business employers have suspended or reduced their contributions this year, more than 90% are still contributing – which is in stark contrast to what happened during the 2008 financial crisis. A September survey by Willis Towers Watson found that most employers that suspended or reduced contributions this year plan to reinstate them by 2021.

Suspending the employer match greatly decreases plan participation and deferral rates, so it’s good that employers are taking advantage of government assistance like the Payroll Protection Program, rather than altering their 401(k)s.

Legislation Amending Loan Rules

Plans are not obligated to incorporate aspects of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, but more than half of small business plans are allowing participants to take advantage of relief by:

  • Permitting workers under 59.5 to withdraw funds as (taxable) income, without the 10% penalty.
  • Allowing increased 401(k) plan loan amounts (up to 100% of the balance, rather than the usual 50%).*
  • Pausing repayment of existing loans that were due through December 1, 2020.
  • Letting workers defer loan payments for up to one year, and, if taken for a COVID-19 hardship, allowed to repay gradually over three years.

Initially, there was not much of an increase in plan loans or withdrawals for small businesses early in 2020, but a quarter of small business 401(k) sponsors reported use of the loan feature as 2021 inched nearer. Nearly 40 of plans noted an increase in withdrawals.

*Ubiquity did not allow for this plan provision

Ubiquity Helps Small Businesses Weather the COVID-19 Crisis

Ubiquity is one of America’s leading administrators of 401(k) plans for small businesses, offering affordable flat-fee plans geared specifically toward small enterprises with fewer than 50 employees, independent contractors, and self-employed workers. We are here to answer questions, provide strategic advice, and help you make the most of small business retirement plans. Easy online setup and management allows you to get started saving for retirement without delay or make changes to your plan as needed.

2021 Solo 401(k) Contribution Deadline

Dylan Telerski / 22 Mar 2021 / Business

Self employed woman saving in a solo 401k in 2021

Did you know it’s not too late to set up and make contributions to a Solo 401(k) for 2020?

Previously, in the years prior to 2020, you would’ve had to get your account established by December 31, but the SECURE Act gives solopreneurs until the business tax deadline, April 15, 2021, to sign up for a Solo 401(k) and start saving for retirement. You may also request an extension to the 2020 Solo 401(k) contribution deadline to get even more time to make your contributions for the year.

What Are the Solo 401(k) Deadlines for 2021?

  • Single LLC and C Corps have until April 15, 2022, to set up and contribute to a Solo 401(k) for 2021.
    Please note: If a plan is adopted in 2022 for 2021 you cannot make pre-tax or Roth deferrals, but you can still make after-tax and employer contributions.
  • Partnership LLC and S Corps have until March 15, 2022, to set up and contribute to a Solo 401(k).
  • If you request and receive an extension, you may have until September or October 15, 2022, or until you file your taxes.

What Are the Solo 401(k) Contribution Limits for 2021?

  • As an employee, you may contribute up to 100% of your wages to your Solo 401(k), to the maximum.
  • The maximum Solo 401(k) contribution limit for employees is $19,500 in 2021.
  • If you’re over 50, you may contribute an additional $6,500.
  • As employer, you can reserve up to 25% of the business entity’s income, to the maximum.
  • The maximum limit for total employee/employer contributions is $58,000 in 2021.
  • If your spouse works for the business, the same allowances may be made on his or her behalf.

Should You Explore Solo 401(k) Plans in 2021?

Solo 401(k) plans offer many benefits over other types of retirement savings vehicles – particularly with the high limits of contributing as both “employer” and “employee.” The ability to choose between traditional and Roth plan types is another benefit, allowing you to choose to pay taxes on the amount invested now and enjoy a tax-free retirement, or skip on paying taxes now and allow your money to compound. If you experience financial hardship, you have the freedom to borrow from your Solo 401(k) if necessary – a key difference between a Solo 401(k) and a SEP IRA.

Opening a Solo 401(k) is easy. Online plan administrator Ubiquity will set you up in no time. If desired, you can rollover money from other accounts or set up automatic transfers from your checking, savings, or payroll accounts. If you’re interested in setting up a Solo 401(k), contact Ubiquity to establish a low-cost plan in minutes.

During his 2020 campaign, President Joe Biden proposed changes to 401(k) retirement plan rules that would likely benefit low and middle-income earners. In this blog, Ubiquity breaks down the potential impact of the proposed changes.

Traditional 401(k) Regulations

Traditionally, employees in 2021 could contribute up to $19,500 a year. Employers (or self-employed individuals) could save up to a combined maximum of $58,000. Savers can set aside an additional $6,500 in catch-up contributions if they’re over 50. The amount saved is deducted off income for the year, thus reducing their taxable income.

For instance, a person earning $200,000 a year putting in 10% to a 401(k) would only pay taxes on $180,000. Yet, a person earning $40,000 who contributes the same 10% would be taxed on $36,000. Lower earners would not reap as much in tax savings and are less incentivized to save. Employees who don’t save enough for retirement may work well beyond their most productive years because they have to, which decreases company performance and morale.

Biden’s 401(k) Plan

At this point, there is still much we don’t know. Biden says the plan would “equalize” the incentive system by replacing tax-deductible contributions with a flat tax credit for every dollar saved. The exact amount of the credit is yet-to-be-determined, but the Urban-Brookings Tax Policy Center estimates a 26% credit.

So, under this plan, if a person contributes $100, the IRS will issue a $26 credit. Someone earning $600,000 would get the same tax break as someone making $60,000 – a $260 tax credit for a $1,000 contribution. As a “refundable” credit, employees receive the full refund, even if it’s more than what they owe.

By and large, the plan would benefit lower and middle-income earners more, while high earners may move to Roth 401(k) accounts.

Additional proposals of Biden’s small business retirement plan include:

  • Automatic Enrollment: 

    Under Biden’s plan, almost all workers will be given the opportunity to conveniently save for retirement at work with a 401(k) savings plan.

  • Federal Backing for Multi-employer Defined Benefit Pension Plans: 

    Forthcoming proposals will seek to provide federally backed loans to underfunded multiemployer defined benefit pension plans.

  • Social Security Payroll Taxes: 

    High-income earners may be required to pay Social Security taxes on a larger proportion of their income. Now, employees and employers each pay 6.2% of wages to fund Social Security. This tax applies to earned income up to $142,800 for 2021. The new plan would increase Social Security taxes for earnings above $400,000, which would be taxed at 12.4%.

  • Financial Transaction Taxes:

    Whenever someone buys or sells a security, it would be considered a taxable event. This tax would pay for new government programs. Retirement plans tend to be the largest purchasers of securities, so the additional taxes may change how plan sponsors buy and sell.

  • Top Income Tax Rates: 

    The Biden plan proposes to increase the individual income tax rate on incomes above $400,000 from 37 percent to 39.6 percent.

Start Your Small Business 401(k) with Ubiquity

Looking for the best 401(k) for your small business? Ubiquity is a leading provider of 401(k) retirement plans for small businesses, whether you’re looking for a plan that covers one or 100. Our platform provides easy online setup in minutes and management that is accessible 24/7. Ubiquity customer service extends to both employers and employees alike. We are happy to help you navigate legislative changes and advise you on the best moves for your situation, at the industry’s most affordable flat-fee rate. Small business retirement planning can be a challenge, especially when the laws are always changing. Ubiquity is here to help. New plans are eligible for up to $16,500 in tax credits over the next three years, so contact us to learn more.

Americans have expressed increased interest in Environmental, Social, and Corporate Governance (ESG) funds over the last decade.

U.S. investors have sunk $17 trillion into assets managed by companies that promote diversity and clean energy. About one-third of all professionally managed assets fit ESG investment rules. Americans invested $21 billion in ESG mutual funds in 2019 – four times the prior record. Despite the economic turmoil, 2020 ESG funds are more than double the records set in 2019. While ESG funds have grown in the last few years, workplace retirement plans have generally not been robust in exploring green investment options.

401(k) Plans and ESG Funds

Workplace-sponsored retirement plans represent a huge pot of wealth. Almost a third of all U.S. retirement assets are held in 401(k) plans. Yet, only 3% of 401(k) plans offer employees an ESG fund investment option. As a result, only a tenth of 1% of 401(k) assets are held in socially responsible funds.

Several roadblocks have prevented these investors from scooping up ESGs:

  • Retirement investment trends

    Target-date funds dominate the workplace retirement plan sphere. The emphasis placed on all-in-one funds that shift from stocks to bonds as investors near retirement are a “safe” default for all employees who are auto-enrolled. One in every $5 invested in 401(k) plans are tied up in such funds – up from one in $10 a decade ago.

  • Possible lawsuits

    Employers are afraid of going out on a limb with investments that could have higher costs or underperform. Companies that pledge adherence to ESG principles will need to live up to their disclosures or find themselves on the receiving end of lawsuits. Even though all but one ESG index fund had higher net returns this year, these lawsuits could potentially jeopardize shareholder profitability, making ESG a riskier type of investment.

  • Trump administration rules

    The Labor Department changes guidance and regulation of ESG funds with every new administration. The Trump administration issued a rule requiring employers to evaluate investments exclusively based on risk and return, rather than taking social responsibility or environmental concerns into consideration. Further, employers were explicitly prohibited from auto-enrolling workers into an ESG fund.

Are Changes Coming in 2021?

2021 has already seen significant movement toward alleviating roadblocks for 401(k) investing based on ESG factors. In March 2021, The Biden administration announced that it would not enforce the 2020 Trump administration rule that made it harder to offer ESGs in workplace retirement plans.

Start Your Small Business 401(k) Plan in 2021 With Green Investment Options

For over two decades, Ubiquity Retirement + Savings has pioneered retirement savings plans designed exclusively for small and micro businesses. Since day one, our innovative solutions and low-cost, flat fee pricing make it easier than ever for small businesses to save for their future.

Our customizable 401(k) offerings include an optional turnkey ESG investment lineup, allowing small business owners to empower employees with the opportunity to save for the future while applying their savings toward the causes they care about most.

Just like personal values, investment strategies are not one-size-fits all. Ubiquity’s sustainable investment lineup includes low-cost mutual funds and exchange-traded funds (ETFs) from Vanguard, giving your team a broad range of options based on risk and personal preference.

Offer a 401(k) plan for your team with a fully diversified investment lineup that offers options for green investors.

Learn more about socially responsible investing with Ubiquity

You’re contributing to your workplace retirement account–that’s great! But how are you dealing with the taxes of the money you can contribute. There are two ways you put money into your 401(k) retirement plan– pretax or Roth.

Pretax contributions are the traditional form of 401(k). This means contributions come out of your paycheck before taxes, and are your distributions in retirement are taxed. This is useful if you’re earning more now than you plan to in retirement. Plus, you lower your taxable income in the present!

Think of the Roth 401(k) as the rebellious little sister of the pretax 401(k). Introduced in the early 2000s, it takes the tax treatment of a Roth IRA and applies it to your employer-sponsored plan. That means contributions come out of your paycheck before taxes, and distributions in retirement are tax-free. That means you don’t pay taxes on your investment growth!

Let’s look at the similarities (and differences) between the two retirement contribution types.

Traditional 401k vs Roth 2021 contribution limits

Traditional 401(k) plans are pretax savings accounts. This means your contributions are made before they've been taxed. Roth 401(k) plans are post-tax savings accounts. This means your contributions are made after they've been taxed.

If you contribute to a 401(k) plan at work, your employer can choose to match a percentage of your contribution. Any employer match will be taxable in retirement.

All About Withdrawals: In a traditional 401(k) distributions in retirement are taxed, just like ordinary income. In a Roth 401(k) there are no taxes on qualified distributions in retirement.

 

Learn more

Curious about different types of retirement accounts? Learn the difference between an Individual Retirement Account (IRA) and a 401(k).

If you’re a small business owner and need a 401(k) or Roth 401(k) plan for yourself and your company, only Ubiquity offers flat-fee plans plus free expert advice. We’ll fully customize your 401(k) to meet the specific needs of your small business.

Check out our cost-effective, plan solutions

The individual 401(k) limit for 2021 is unchanged at $19,500. If you’re over 50, you can contribute a total of $26,000. The total combined employer/employee contribution is capped at $58,000.

Each year, the IRS announces whether it will raise the maximum allowable 401(k) contributions limit. Some years, the limit increases $500 or $1,000; other years, the limit stays the same. Attaining the maximum contribution shields 401(k) plan participants from having to pay federal taxes on the amount contributed, while building the best possible nest egg for retirement.

Has the 401(k) limit changed in 2021?

The main individual 401(k) contribution limit remained the same, but the combined employer/employee max increased $1,000. If you’re self-employed, you can save $58K.

Why does the 401(k) limit change?

Sometimes the IRS adjusts the maximum limit based on “cost of living increases.” From 2018 to 2019, they increased the individual limit $500 from $18,500 to $19,000, and the total employer/employee contributions from $55,000 to $56,000.

What are catch-up contributions?

Those over 50 are getting closer to retirement. Depending on how well you’ve saved and how your cost of living has fared over the years, you may wish to increase contributions to allow for a more comfortable retirement.

What is the combined employer/employee 401(k) limit in 2021?

Most employer plans match some or all employee contributions. The employer match represents free money on top of the $19,500 individual limit that employees can earn just by participating in the plan. The combined employer and employee contribution limit is $58,000 in 2021.

This figure also matters if you are a business owner, freelancer, or solopreneur with a Solo 401k, as you can contribute as both “employer” and “employee” to the 2021 maximum of $58,000. If you’re over 50, you can save $64,500. A spouse may also participate in this plan for a maximum household savings of $116,000 (if you’re under 50) or $129,000 (if you’re over 50).

Adding a cash balance plan can help you maximize tax and retirement savings further, possibly doubling or tripling the amount set aside for your future.

What can you contribute to a Solo 401(k) plan in 2021?

Freelancers, solopreneurs, and the self-employed can contribute to a Solo 401(k) plan as both employer and employee. The total contribution amount allowed in 2020 is $57,000, though individuals over 50 can contribute an additional $6,500. Those who qualify to make catch-up contributions can put up to $63,500 into a Solo 401(k) for 2020.

If you have already reached your maximum contribution limit, adding a cash balance plan can double or even triple your tax savings.

What is the SIMPLE plan contribution limit in 2021?

Companies with fewer than 100 employees are eligible for a SIMPLE retirement savings plan. This limit remains the same at 100% of compensation or $13,500 in 2021. Catchup contributions are allowed for employees over 50.

For SIMPLE plans, the elective deferral limit is 100% of compensation or $13,500 in 2020 and 2021. If the employee is age 50 or older, catch-up contributions may also be allowed.

What can you contribute to a 403b or 457 plan in 2021?

Contribution limits for 403b nonprofit and 457 government plans have stayed the same $19,500 in 2021.

How much can you contribute to IRAs in 2021?

Many retirement savers favor the 401(k) because it allows a higher contribution limit than IRAs. Contribution limits for Traditional and Roth IRAs remained unchanged at $6,000 for 2021. This marks the third consecutive year of no change. Prior to 2019, the $5,500 IRA contribution allowance remained consistent for six years. Those over 50 can put in an extra $1,000 to catchup. IRA eligibility can be limited by income range, marital status, and workplace plan availability.

Should you hit the maximum contribution limit?

Many Americans like to take advantage of 401(k) options because they reduce the taxable income for the year. So, if you are earning $210,000/year and put in the maximum $19,500, you will only be taxed on $190,500 worth of income, which takes you from the 35% to the 32% tax bracket. Instead of owing the IRS $73,500 in taxes, you will only pay $60,800. Any money contributed to the plan compounds, with all gains tax-deferred. You only pay tax once you start withdrawing the funds in retirement.

Not everyone can afford to save $19,500 each year, but financial advisers recommend setting aside 15 percent of your income for retirement – or, at the very least, saving enough to meet the maximum employer match. Plans vary, but employers often match 50% of your contributions up to 6% of your salary or 100% of your contributions up to 3% of your salary.

Contact Ubiquity to set up a simple, low-cost 401(k) for your small business and start saving today. We offer our clients ample resources and assistance with their plans, and our experts are ready to answer your questions about your 2021 retirement contribution limits, as well as the 401(k) contribution limit deadlines for 2020. Call today and discover for yourself what sets Ubiquity apart from the rest!

The pandemic has led to serious hardship for many Americans, including furlough, job loss, illness, and lost business income.

When facing unexpected financial challenges such as these, most advisors recommend cutting expenses, taking money out of emergency savings, tapping your brokerage account, or putting expenses on a 0% interest credit card rather than raiding your retirement nest egg. However, borrowing from your 401(k) may suddenly seem like a risk worth taking if these other options are not available to you.

December 30th, 2020, was the last opportunity to take advantage of eased CARES Act hardship withdrawal rules, but you may qualify for conventional relief in 2021. If you already took a withdrawal in 2020, you’ll need to know the payback rules to ensure you don’t rack up additional penalties.

Can You Take a 401(k) Hardship Withdrawal in 2021?

The IRS defines eligible 401(k) hardships as “immediate and heavy financial needs.” These needs generally include:

  • Medical care
  • Tuition
  • Emergency home repairs
  • Funeral costs
  • Eviction prevention

The purchase of a boat, investment property, or television would not be considered a heavy financial need. However, in 2020, the CARES Act created a provision that allows for a hardship withdrawal for people whose health or finances have been impacted by COVID-19.

Not all plans permit hardship withdrawals, so you will need to check with your 401(k) provider or sponsor to see if this opportunity exists for your particular plan. If it is permitted, you will have to demonstrate that you lack available funds to cover your expenses.

401(k) Hardship Withdrawal Rules 2021

If your plan allows for early distribution, the 401(k) hardship withdrawal rules for 2021 are as follows:

  • You can only withdraw what you need. If you’re seeking money to fix your house after a flood and receive an estimate for $10,000, that is how much you’ll be approved to borrow. You make take out additional funds to cover related costs like tax or replacement furnishings. The CARES Act set a COVID-19 withdrawal limit of 100% of the vested balance, to a maximum of $100,000. (Under normal circumstances, hardship withdrawals are limited to 50% of your balance or $50,000.) This maximum includes all amounts withdrawn from tax-advantaged savings accounts, so you can’t raid IRAs, 403bs, and multiple 401(k)s.
  • What you borrow may be subject to tax and penalties. Hardship withdrawals are typically subject to income tax and a 10% early withdrawal penalty (for those under age 59.5). The 10% penalty is waived for COVID-related hardship withdrawals, and you may spread out the tax payments on the amount borrowed over the course of three years.

Who Qualifies for COVID-related 401(k) Hardships in 2021?

The IRS allows withdrawals for COVID-related 401(k) hardships if:

  • You, your spouse, or a dependent are formally diagnosed by a CDC-approved test.
  • Your household suffers a financial setback from quarantine, furlough, a layoff, or reduced hours.
  • Lack of child care due to COVID-19 causes adverse financial consequences.
  • The business you own or operate had to reduce hours, limit capacity, or close because of the virus.

Is There a Deadline for COVID-19 Withdrawals?

The deadline for a 2020 tax year withdrawal was December 30th, 2020. The IRS is continually updating their rules along with this fluid situation, so it is possible they will formally announce some type of relief applicable to the 2021 tax year as the pandemic persists.

Is There an Extended Deadline for Repaying Hardship Distributions?

If you took a hardship loan prior to the 2020 COVID-19 pandemic with repayment due between March 27 and December 31, 2020, the CARES Act allows you to delay this repayment by up to one year.

If you took a CARES Act distribution, you may repay all or part of the amount of a coronavirus-related distribution to an eligible retirement plan, within three years after the date that the distribution was received.

Managing the Tax Hit of a 401(k) Hardship Withdrawal

If you took money out in 2020, you are allowed the opportunity to repay the money back into your account over a three-year period to avoid paying income tax on the distribution. So, for instance, if you borrowed $9,000, you could repay $3,000 in 2020, 2021, and 2022. There is no rule stipulating you must space your repayments out evenly. If you’re still hurting at the end of 2020 and even through 2021, you may elect to repay the full $9,000 in late 2022.

If you cannot repay the amount borrowed from your 401(k) over the next three years, that money will be taxed as income – and you will be subject to the interest and penalties that have accrued since you took the money out. The lowest tax bracket is 10%, so that means you’d owe at least $5,000 in taxes if you took out $50,000. Typically, plan participants only have 60 days to redeposit early withdrawals, so the CARES Act’s three-year window is exceedingly generous.

Were Hardship Withdrawals a Popular Option During the Pandemic?

According to data collected by Vanguard:

  • About 5.3% of 401(k) plan participants withdrew CARES Act distributions through November 2020.
  • The majority of retirement account holders stayed the course with mutual funds, stocks, and bonds.
  • The median age of someone taking a CARES Act withdrawal was 43.
  • The median income was about $62,000.
  • The median amount withdrawn was $12,800.

How to Get Your 401(k) Back on Track After A Hardship Withdrawal

The biggest downside of taking an early withdrawal is that you lose potential growth on your investments and the momentum of compounding interest. If you’re between the ages of 30-50, simply boosting your retirement savings by 1% per paycheck could be enough to rebound from the 401(k) withdrawal. Workers between the ages of 50-70 may need to save more aggressively, depending on how much they’ve accrued, how much they’ve recently borrowed, and how soon they wish to retire.

How to Learn More About 401(k)s, Hardship Withdrawals, and IRS Rules for 2021

Ubiquity is a top provider of Solo 401(k) and small business 401(k) plans. If you have any questions about opening a new retirement account or taking full advantage of an existing 401(k), contact us for expert advice.

IRS 401(k) Limits 2021

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

2021 401k limits

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

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

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

401(k) Contribution Deadline in 2021

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

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

 

2021 401(k) and 403b Individual Contribution Limits

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

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

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

2021 401(k) Maximum Employer/Employee Limits

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

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

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

SEP IRA and Solo 401(k) Limits in 2021

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

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

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

SIMPLE 401(k) Limits for 2021

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

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

2021 Highly Compensated Employee and Key Employee Definitions and Limits

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

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

2021 Roth and Traditional IRA Contribution Limits

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

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

2021 Traditional IRA Modified Adjusted Gross Income Limits for Full Deductibility

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

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

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

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

2021 Traditional IRA Modified Adjusted Gross Income Limits for Partial Deductibility

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

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

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

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

2021 Roth IRA Modified Adjusted Gross Income Phase-Out Ranges

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

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

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

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

 2021 Health Savings Account (HSA) Contribution Limits

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

Are Employer Contributions Going Up in 2021?

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

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

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

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

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

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

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

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

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

Do Other Retirement Accounts Allow Catch-up Contributions?

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

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

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

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

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

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

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

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

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

Set Up Your 401(k) with Ubiquity

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

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.

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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.

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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.

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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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