Category: 401(k) Resources

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All About 401(k) Hardship Withdrawals

Siân Killingsworth / 5 Sep 2023 / 401(k) Resources

hardship renovation

Sometimes life sends us devastating curveballs with deep financial consequences. If you’ve fallen into dire circumstances, and have already dipped into your savings, there may be hope in your 401(k) plan. While ordinarily, you cannot withdraw money from your retirement account until your employment ends (or turn 55), many plans allow something called a hardship withdrawal.

What counts as a hardship?

While lots of overwhelming financial situations can arise in life, only specific circumstances can be classified as a hardship. According to the IRS, a hardship must be an “immediate and heavy financial need” and “the [withdrawal] amount must be necessary to satisfy the financial need.” That second part means that there can’t be any other resources used to cover your emergency.

Most plans allow withdrawals for the following:

  • Unexpected medical expenses not covered by your insurance (For you, your spouse, or your dependents)
  • Purchase of a home (Your principal residence—not a vacation home)
  • Tuition and related educational fees
  • Preventing eviction or foreclosure
  • Funeral or burial expenses
  • Repair of major damage your primary home

Every plan is different; so it’s important to check with your employer see if your plan has any additional requirements or restrictions. Your plan administrator may need some documentation along with your request to illustrate your financial need. This will generally involve information about the hardship, verifying how much you need, and proving you’ve exhausted all other options.

After you take a 401(k) hardship withdrawal

Most plans require the employee to stop contributing to their plan for six months following a hardship distribution. Hardship distributions are taxable and subject to the 10% early withdrawal penalty unless an exception applies.

Do you qualify for a 401(k) hardship withdrawal?

To find out if your plan allows for a 401(k) hardship withdrawal you will need to talk to your plan sponsor, which might be someone in the HR department or even the owner of your business. You can also call the phone number on your 401(k) account statement.

Should I take a 401(k) loan instead of a 401(k) hardship withdrawal?

Employees are required to repay these loans, and unlike the hardship withdrawal, they will not be taxed for the loan. One thing to keep in mind about 401(k) loans is that they are generally recommended as an absolute last resort in comparison to other types of loans. Want to learn more? Check out our post on Is it a Good Idea to take out a 401(k) loan?

Anything else I should think about?

Tax Implications

If you are younger than 59 ½, you’ll owe a 10% early distribution tax, in addition to federal, state, and local taxes if you distribute pre-tax savings.

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

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

Solo 401(k) Investment Possibilities

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

Solo 401(k) investment options include:

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

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

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

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

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

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

How a Solo 401(k) Works

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

Solo 401(k) Limits for 2020

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

Are You Eligible for a Solo 401(k)?

Take advantage of the widest range of investment possibilities if:

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

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

Considering a 401(k) withdrawal? Here’s how much you can get if you choose to cash out your 401(k):

  • Traditional 401(k) (age 59.5+): You’ll get 100% of the balance, minus state and federal taxes.
  • Roth 401(k) (age 59.5+): You’ll get 100% of your balance, without taxation.
  • Cashing out before age 59.5: You will be subject to a 10% penalty on top of any taxes owed.

Cashing out early will also result in lost growth. Therefore, it’s recommended that you let your money sit as long as possible to reap the full reward of your retirement savings. Of course, in some scenarios, it’s easier said than done to let the cash sit.

How Much Will I Lose Cashing Out My 401(k) Early?

Consider this concrete example. Let’s say your plan allows early distributions, so you decide to take $10,000 out of your 401(k). You’re taxed at a federal rate of 22% and a state rate of 8%, so you’ll end up paying $2,500 in federal tax and withholding, plus $800 to the state. That means that you will be paying a hefty $4,300 from your retirement savings to receive $5,700.

Worse yet, assuming the average 8% year-over-year returns, leaving that $10,000 in the account could make you $68,485 over the next 25 years.

How much will you pay for 401(k)? Get an instant quote.

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

Or schedule a free consultation with a retirement specialist.

Should You Cash Out a 401(k) When Leaving a Job?

One option after you have left your employer is to have the plan administrator cut you a check for the full amount you’ve invested in the 401(k) plan. However, the check balance will only be for 70% of your 401(k) balance — with 20% deducted for taxes and 10% deducted as a penalty.

For most, a better alternative would be to roll the 401(k) over into a new employer’s 401(k), OR (if you don’t have a new employer yet) into a Solo 401(k) or IRA.

Arranging a custodian-to-custodian transfer within 60 days of leaving your job will not trigger a taxation event or a penalty. That way, your money can continue to grow and earn interest, and you can elect to take your regular distributions in retirement as originally planned.

Should You Take a 401(k) Loan or 401(k) Withdrawal?

Some plans allow loans from 401(k) plans as an option to get access to the fund for virtually any purpose. Maybe you want to travel, pay your child’s college tuition, put a down-payment on a new house, or cover the cost of a divorce. There are many personal reasons to consider a loan.

Generally, you can take up to 50% of the balance to a maximum of $50,000. The good news is that there is no age restriction, and there are no taxes due when you take out a loan. However, the loan must be repaid over a five-year period, with interest owed back to your account.

There is risk involved in taking out a loan. Some plans allow you to roll over a 401(k) (and loan balance) when changing employers. However, in other cases, you may have to pay your outstanding loan balance in full within 60 days of leaving an employer; otherwise, it will be considered a 401(k) withdrawal, taxed as ordinary income and subject to the 10% withdrawal penalty.

Compared to a loan, an early 401(k) withdrawal:

  • Must have an option that allows for in-service withdrawals, which may be restricted by age or hardship.
  • Will be taxed as ordinary income (while loans are generally not taxed).
  • Can be subject to a 10% penalty if you’re under 59.5 (whereas there is no restriction with loans).
  • Will not require repayment (as you would a 401(k) loan).

Are there any exceptions for getting 401(k) cash early without penalty?

You can cash out a 401(k) before age 59.5 without paying the 10 percent penalty if:

  • You become completely and permanently disabled.
  • You incur medical expenses that exceed 7.5% of your gross adjustable income.
  • You are court-ordered to give funds to a former spouse or dependent.

In some cases, 401(k) cash with the 10 percent penalty is the best option. The purchase of a primary residence, higher education tuition, preventing eviction, out-of-pocket medical expenses, or a severe financial hardship can cause you to need the funds sooner rather than later.

The case for NOT cashing out a 401(k) early

Keep in mind compound interest only works if you leave the money sitting. When you cash your retirement checks early, you’re not only subtracting that sum from your future retirement, but you’re also negating potential interest accrued over the years and losing almost 30 percent of your balance to taxes and fees.

It may be tempting to view your 401(k) as your own personal bank account, but it can be so much more if you have the willpower to let your money work harder for you.

Are you considering taking money out of your 401(k)? Try our 401(k) calculator to see if this option is right for you.

In 2022, the total annual contribution maximum, including 401(k) employer matching, is $61,000–or up to 100% of the employee’s salary if they make less than that. Individuals may contribute up to a maximum of $20,500 to their 401(k)s or $27,000 if they’re 50+ years old. Employer contributions are added ON TOP of this limit to a maximum of $61,000.

How Much Should I Contribute to My 401(k) With Employer Matching?

Of course, how much you can contribute to a 401(k) and how much you should contribute can be two different calculations. First, you’ll want to find out what your employer match is to be sure you’re maximizing your savings. Then you may need to crunch a few more numbers to determine how much you should put into your retirement account without overburdening yourself now.

What Is Your Employer Match?

The exact match amount varies from employer to employer, so you will need to ask human resources or your boss about the plan details to be sure your contributions meet the level of the maximum employer match.

Generally speaking, the average matching contribution is 4.3% of an employee’s pay. Nearly three-quarters of employers prefer to match 50 cents on the dollar, up to 6% of employee pay. About one-quarter of employers elect to match dollar-to-dollar, up to a maximum of 3% employee pay.

You want to be sure you’re contributing at least enough to earn all of the matching dollars your employer offers. After all, this is FREE money.

When Should You Max Out Your 401(k)?

Personal financial experts recommend saving at least 15% of your annual income for retirement. If you’re making at least $135,000 in 2022, 15% will bring you to the maximum $20,500 contribution for high earners. If you can afford to save the maximum, you should take advantage of employer matching, tax savings, and compounding interest to build a robust retirement portfolio this way.

When Shouldn’t You Max Out Your 401(k)?

On the other hand, if you’re earning $50,000 a year, you probably can’t afford to set aside 39% of your total income. Certain financial priorities should come before maxing out a 401(k), such as:

  • Saving three to six months of basic living expenses in an emergency fund
  • Eliminating high-interest credit card debts and personal loans
  • Being able to save for short-term goals like having a child, buying a home, or buying a car
  • Covering yourself with adequate life insurance
  • Contributing the maximum to your Health Savings Account

Is Your Plan Working For You?

If your work retirement plan is burdened by high fees and lackluster investment lineup, it may not be worth hitting the maximum contribution. Read over a copy of your summary plan description and annual report before considering your next move. Other tax-advantaged retirement options like Traditional or Roth IRAs may let you contribute up to $6,000 or $7,000 a year with more control over your investment options.

If you’re an employer looking out for your workers, you can always contact Ubiquity to discuss starting a new plan or switching plan providers to take advantage of our administrative services without paying AUM fees, per-participant fees, or other unnecessary costs.

You can make withdrawals from a 401(k) without IRS penalty under several circumstances:

  • You’re age 59 ½

  • You’re rolling over your funds

  • You’ve experienced a hardship

You’re age 59 ½.

The IRS encourages long-term saving and growth by levying a 10% early withdrawal penalty on money taken out of 401(k) accounts prior to participants reaching 59 ½ years of age. However, once you reach that magic number, you can feel free to take withdrawals to cover living expenses and other financial needs.

Keep in mind that you’ll need to pay taxes on the money as you take it out (unless you have a Roth 401(k)), and any money left in will continue to earn tax-deferred or tax-free growth.

You’re rolling over funds.

If you leave, quit, or get fired from the company at age 55 or older, you can cash out that account in a lump sum withdrawal without incurring a penalty.

If you’re under 55 years of age (or if you prefer), you have up to 60 days to rollover your funds to a new 401(k) or IRA without triggering a taxable event. The best way to accomplish the rollover is to transfer the money directly from the old custodian to the new custodian to avoid having 20% automatically withheld for income tax.

If you fail to put the entire amount into a new retirement account within two months, it will be considered a distribution that is not only taxed but penalized if you’re under 59 ½.

You’ve experienced a hardship.

Penalty-free withdrawals are allowed for certain hardships, such as:

  • Medical debt that exceeds 7.5% of your Adjusted Gross Income (or 10% if you’re under 65).
  • Suffering a permanent disability.
  • Court-ordered withdrawal to pay a former spouse or dependent.
  • Being called to active duty military service.

Some 401(k) plans allow savers early access to funds to buy a primary residence, pay for educational expenses, cover funeral costs, make necessary home repairs, or prevent foreclosure – but a penalty must be paid. Each plan is different, so it’s important to ask before taking the money out.

Once you take a hardship withdrawal, you’re generally barred from contributing to the 401(k) for at least six months. You will also be limited to the principal funds you’ve contributed, and you will still have to pay taxes on traditional 401(k) funds.

How much will you pay for 401(k)? Get an instant quote.

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

Or schedule a free consultation with a retirement specialist.

You agree to substantially equal periodic payments.

Some people choose to retire early once they reach 50. By agreeing to substantially equal periodic payments under Internal Revenue Code Section 72(t), you can withdraw money from your 401(k) once a year for a minimum of five years or until you reach age 59.5 – whichever period is longer.

You may use one of three methods to calculate your payments:

  • RMD Method

    Use IRS life expectancy tables to figure out your life expectancy and divide your account balance by the number of years. This is the easiest method but yields the smallest distribution.

  • Fixed Amortization Method

    Draw down your account value over the course of your life expectancy after applying an IRS-approved interest rate to your account balance.

  • Fixed Annuitization Method

    Use an annuity factor from the IRS mortality table combined with the IRS-approved interest rate.

Contact Ubiquity to inquire about 401(k) plans or if you have questions about making a 401(k) withdrawal.

Generally speaking, single-file individuals may contribute up to $19,500 to a 401(k) in 2020. Joint filers can contribute up to $19,500. An additional $6,500 is allowed in catchup contributions for 2020 for those 50 and over.

Employers may contribute up to $37,500 extra in matching contributions to a grand total of $57,000.

If you are considered a “highly compensated employee,” you may not have the same 401(k) contribution limits as your fellow employees. Nevertheless, there are ways to work around IRS restrictions and maximize your retirement savings.

How much can high earners contribute to a 401(k) in 2020?

By American standards, a “high earner” household brings in $100,000 to $350,000. If you fall into the low end of this category but earn less than $130,000, each adult filing separately in your household can contribute $19,500 into a 401(k), plus receive employer matching contributions.

If you are self-employed or an entrepreneur, you may contribute as both employee and employer to a maximum of $57,000. If you are over age 50, you can set aside an additional $6,500 in catch-up contributions.

Are you a highly compensated employee?

Different rules apply if the IRS defines you as a “highly compensated employee.” An HCE is someone who meets one or more of the following criteria:

  • Received $130,000 or more in compensation from a 401(k)-sponsoring employer – “Compensation” covers paycheck income, overtime, bonuses, commissions, and salary deferrals made toward 401(k)s.
  • Owns more than 5% of the interest in the business sponsoring his or her 401(k) plan – The ownership of company shares includes that of you, your spouse, children, and grandchildren working for the firm. So, if your holdings are 3%, and your child owns 3%, you are both considered “highly compensated employees.”
  • Has been designated by the employer as a top earner for non-discrimination testing purposes – Employers may also choose to designate you as a “highly compensated employee” if you rank among the top 20% of employees paid.

For your employer to pass non-discrimination tests, average contributions made by HCEs can’t be more than 2% higher than the average contributions made by non-highly compensated employees. If the average contribution made by non-HCEs equals 4% of their salaries, the average contribution HCEs make can’t exceed 6% of their salaries.

The total amount of HCE contributions cannot exceed 2% of the total amount of non-HCE contributions. So how much high earners are able to contribute depends on how much the average worker contributes or whether the average worker is participating at all.

What if you’ve maxed out your contributions?

Companies conduct non-discrimination testing by March 15. Highly compensated employees who have maxed out their contributions can expect a refund of the excess contributions. This refund counts as taxable income and will increase tax liability for the current year.

Other options for high earners to maximize retirement savings

That $6,000 in catch-up contributions for those over-50 has no earning limit, so HCEs can at least maximize there. HCEs can also contribute up to $3,550 into an individual health savings account or up to $7,100 for a family, plus $1,000 a year if you’re over 55.

Highly compensated employees are ineligible for a tax-deductible Traditional IRA — which phases out once modified adjusted gross income reaches $65,000 single-file or $104,000 joint-file in 2020; however, they can save $6,000 (under 50) or $7,000 (50+) in after-tax contributions to enjoy tax-free earnings and growth.

A non-deductible IRA may also be converted into a Roth IRA – a strategy known as the backdoor Roth IRA – which allows HCEs to avoid paying tax on the conversion.

Many companies offer a deferred compensation plan, which allows a percentage of salary and taxes to be deferred to retirement. Many HCEs also put money into a low-cost deferred variable annuity, which functions like a non-deductible IRA without the contribution limits.

Spouses of HCEs can also max out their 401(k) contributions if they are not designated HCEs.

Contact Ubiquity to learn more about maxing out 401(k) contributions.

What Is the 401(k) Limit for 2020?

Siân Killingsworth / 17 Jun 2020 / 401(k) Resources

2020 Contribution Limits

Maximum 401(k) contributions offer a shield from tax liability while allowing you to earn more money for retirement. Tax-deductible contributions to retirement accounts are subject to IRS limits, which may change from year to year. The individual 401(k) limit for 2020 is $19,500 for those under 50, and $26,000 for those 50+.

Has the 401(k) limit changed in 2020?

The IRS sometimes adjusts the maximum 401(k) limit based on cost of living increases. Last year, they allowed $19,000 in contributions. This year, the amount increased $500.

What catch-up contributions are allowed?

Catch-up contributions for those over 50 have increased $500 to $6,500. The 8.3% increase is well above the recent 1-3% annual inflation rates. This allowance can help you catch up on retirement savings if you started late.

What is the combined employer and employee 401(k) limit in 2020?

Most employer plans agree to match some or all employee savings. The employer match is free money on top of the $19,500 individual limit. The combined employer and employee contribution limit is $57,000 in 2020.

If you can’t afford to save to the full 401(k) limit, you should at least strive to meet employer match requirements. Plans vary from employer to employer, with some offering to match 50% of your contributions up to 6% of your salary, and others offering to match 100% of your contributions up to 3% of your salary.

What about Solo 401(k) plans?

The self-employed, freelancers, and solopreneurs can contribute to Solo 401(k) plans as both employee and employer. In 2020, the total amount allowed is $57,000, with another $6,500 allowed for those over 50. If you are eligible for the catch-up contribution, you can contribute up to $63,500 into a Solo 401(k) for 2020.

If you’ve already hit the maximum, you can add a cash balance plan to the mix to double or even triple your tax savings.

What about SIMPLE plans?

Companies with fewer than 100 employees may have a SIMPLE retirement savings plan. The contribution limit for SIMPLE 401(k), 403b, and IRA plans was raised by $500 to $13,500 in 2020.

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

Contribution limits for 403b nonprofit and 457 government plans have also increased to $19,500.

What can you contribute to IRAs in 2020?

Contribution limits for Traditional and Roth IRAs remained unchanged at $6,000 for 2020. Those over 50 can catch up with an extra $1,000. Eligibility to contribute to IRA plans may be limited by your income range, marital status, and workplace retirement plan availability.

Should you hit the 401(k) limit?

Many Americans like to take advantage of Traditional 401(k) plan options because their contributions are considered pre-tax. Once that $19,500 is in your retirement account, it grows, tax-deferred, until you begin withdrawing that money in retirement. Also, contributing to your 401(k) limit reduces your annual income level at tax-time.

For instance, if you are under 50 years old earning $210,000/year, but you set aside the maximum $19,500, you will only be taxed on $190,500. The reduced tax burden also takes you from the 35% to 32% tax bracket for the year. Instead of paying $73,500 in taxes, you will be paying $60,800.

Financial advisers generally recommend setting aside 15 percent of your income for retirement.

From making Roth 401(k) contributions to avoiding penalties by not withdrawing funds early, there are several strategies for reducing your tax burden with a 401(k) retirement savings account.

Avoid paying additional taxes and penalties by not withdrawing your funds early.

First and foremost, you want to avoid withdrawing money from a traditional IRA before age 59.5. There is a 10% early withdrawal penalty on top of the income tax owed. However, if you leave your job at age 55, you may be able to at least take a penalty-free 401(k) withdrawal from that particular job under the “Rule of 55,” though you’ll still be hit with income tax.

You may be eligible to take out a fixed five-year loan worth up to 50 percent of your balance without incurring additional taxes – as long as you pay the money back on-time. Alternatively, you may qualify for a hardship exemption that absolves you from having to pay an IRS penalty at the very least.

Make Roth contributions, rather than traditional 401(k) contributions.

If you expect to be in a higher tax bracket in your retirement years, you may consider setting up an after-tax Roth account, where you pay your taxes sooner rather than later. When you take distributions out in retirement, you will owe no tax, as you have already paid it when you put the money into your account.

While you don’t avoid paying taxes entirely, a Roth 401(k) allows you to avoid paying tax on any earnings and interest you may have accumulated over 20-30 years.

Delay taking social security as long as possible.

Keeping yourself in a lower tax bracket will reduce the amount of your tax liability. If you don’t need that much money right now, you can live off your 401(k) withdrawals starting at age 59.5 and wait until age 70 to begin collecting Social Security benefits. Not only does it reduce the taxes owed now, but waiting until “full retirement age” also increases your payment by almost a third later on.

How much will you pay for 401(k)? Get an instant quote.

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

Or schedule a free consultation with a retirement specialist.

Rollover your 401(k) into another 401(k) or IRA.

Quitting, getting laid off, or getting fired from a job that provides a 401(k) could trigger a taxable event. If you have a very small amount in the account ($1,000 or less), you may be able to leave the money where it is. If the money is between $1,000-$5,000, you may want to roll the cash over into an IRA or do a custodian-to-custodian transfer to a new employer’s 401(k) or a solo 401(k). You have up to 60 days to roll the money over without being charged tax.

Consider tax loss harvesting.

Tax-loss harvesting helps investors minimize what they pay in capital gains taxes by offsetting the amount they must claim as income. Capital losses occur any time an asset diminishes in value and is sold for a price lower than the initial purchase price. Selling investments at a loss can lower or even eliminate the amount of taxes paid on gains that year.

Tax-loss harvesting only applies to taxable investment accounts – not IRA or 401(k) accounts, which grow tax-deferred and are not subject to capital gains taxes. Married couples can claim up to $1,500 (filing single) or up to $3,000 (filing joint) per year in realized losses to offset federal income tax.

Tax-loss harvesting won’t help you avoid paying tax on a 401(k) withdrawal directly, but it can offset your overall tax obligations.

Contact Ubiquity for details on 401(k) plans, including questions on 401(k) withdrawals.

401(k) plans are for private, for-profit businesses. 403b plans are for tax-exempt organizations and non-profits.

The 401k and 403b are both tax-advantaged retirement savings plans. Both accept payroll deductions and help employees grow their retirement nest eggs through investment options like stocks, mutual funds, ETFs, and other vehicles. Both allow for employer match or profit-sharing contributions at the employer’s discretion, up to 25% of eligible payroll.

Loans can be taken out from both plans if necessary, offering a low-cost lifeline for buying your first home, paying college tuition, or staying afloat during emergency situations.

Differences between 401(k) and 403b

The plans differ in terms of:

Plan Sponsors

ANY employer, big or small, can sponsor a 401(k) if they choose to do so.

On the other hand, only non-profit companies, religious organizations, school districts, and governmental organizations may have a 403b plan.

Employee Eligibility

To be eligible for a 401(k), participants must be at least 21, with at least one year of service and 1,000 hours or more of service per year. Union employees entered into collective bargaining agreements and non-resident aliens are generally ineligible. Individual employers can mandate when employees become “vested” in the plan.

To be eligible for a 403b, there are no age or annual requirements, but employees must work more than 20 hours per work. Professors on sabbatical, union employees, and non-resident aliens are generally excluded. Only certain types of industries may have a 403b.


The 401(k)’s employer contributions are deductible for employers, whereas 403b employer contributions are tax-deferred for employees. Both accounts are pre-tax and tax-deferred for employees.

Contribution Limits

The deferral limit for both 403b and 401(k) is $20,500, with an additional $6,500 in catchup contributions allowed for those over 50.

However, the 403b plan allows workers with at least 15 years of service to add another $3,000 to their limit each year, to a maximum of $15,000.

Investment Options

A 401(k) account allows for a vast range of investments, including index funds, bond funds, large-cap and small-cap funds, real estate funds, foreign funds, and more – though they may be limited by the employer or broker selected.

By comparison, the 403b options are limited. In the past, employees could only invest in an annuity — a financial product offered through insurance companies that provides fixed payments to the annuity holder. Only recently have mutual funds become available, but not all employers offer them.


In the past, 403b plans were exempt from certain administrative processes that applied to 401(k) plans, thus lowering the overhead administrative costs. However, the limited investment options often led to higher fees than many 401(k) plans. Today may 403b plans are required to follow similar ERISA compliance requirements, so there is not much difference in administration.


Overall plan costs are determined by the types of investments selected, the level of service, and the plan provider/broker selected. Certain types of assets, like a variable annuity, may have higher fees that cut into your earnings. It’s worth exploring alternatives if you are looking to cut costs.

Which one is better?

Both options are great ways to save for retirement. However, if you find the investment choices are too limited and the costs too high for a 403b, switching to a 401(k) is always an option.

Since 1999, Ubiquity has offered flat-rate small business 401(k) plans with full transparency and no AUM fees or hidden costs. You may work with the broker of your choice to select investment options, while we administer the plan and provide full employer/employee support. Contact us to learn more.

If you are over 50 years of age, you may contribute a maximum of $26,000 to your 401(k) plan in 2020.

Nearing retirement and trying to save a little extra? You’re in luck. There is a special provision for savers over 50 called a catchup contribution that can help you achieve your retirement goals.

What Is a Catchup Contribution?

A catchup contribution allows people ages 50 or older to make additional contributions to their retirement accounts. This rule applies to both 401(k) accounts, as well as individual and/or individual retirement accounts (IRAs) and allow for larger deferrals than the standard contribution limit.

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How did 401(k) catchup contribution limits change in 2020?

The catch-up contribution limit for employees 50+ increased by $500– from $6,000 to $6,500.

How much can you save for your retirement in 2020?

If you want to maximize your retirement savings, you can invest in multiple accounts:

  • Save up to $7,000 in your IRA: The 2020 contribution limit for Traditional IRAs and Roth IRAs remained the same at $6,000, with $1,000 allowed for 50+ catchup contributions.
  • Save up to $16,500 in a SIMPLE 401(k): The SIMPLE 401(k) contribution limit increased by $500 to $13,500. The catchup contribution amount is $3,000.
  • Save up to $26,000 in a 401(k), 403b, 457, or TSP. The regular contribution limits increased by $500 — from $19,000 to $19,500, regardless of employee age. Employees over 50 can add $6,500.

Why did the IRS increase the maximum contribution limits?

The Internal Revenue Service announced these increases as “cost-of-living adjustments.”

History of catchup contributions

The catchup contribution provision was created by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), so that older individuals would be able to set aside enough savings for retirement.

Employee catchup contributions have been allowed since 2002. Back then, employees could put away $11,000 for their retirement, plus an extra $1,000. The catchup contribution increased $1,000 every year from 2002-2006 and then remained at $5,000 for three years.

From 2009-2014, the over-50 catchup was $5,500. From 2015-2019, employees over 50 could contribute an additional $6,000 to their accounts.

When can you make catchup contributions?

“Catch-up contributions” allow people age 50 and older to set aside extra money to compensate for their younger years where they may not have saved enough. Generally, people earn more as they advance in age, which is why the magic number for catchups starts at 50.

However, you don’t have to wait until your 50th birthday to start catching up with your contributions. Technically, you can start putting in catchup contributions as of January 1 of the year you are set to turn 50.

Should you take advantage of the catchup contribution?

The tax benefit of a 401(k) catchup contribution can be huge. For instance, if you are a 50-year-old worker in the 24% tax bracket who contributes the full $26,000, you can reduce your tax bill by $6,240 — $1,560 more than younger workers.

High earners have the most to gain. If you max out your 401(k) in the 37% tax bracket, you could reduce your income tax bill by $7,215 in 2020; if you are married and your spouse maxes out, you’re in for double the savings.

Despite the great news, only 15% of plan participants are taking full advantage of their catchup contributions–either because they’re unaware the benefit exists, they haven’t prioritized their tax-advantaged retirement savings account, or they can’t afford to set aside the extra money.

Saving for your retirement can be easier than you think with our employee financial wellness tools. Contact Ubiquity to learn how to set aside the maximum amount for your retirement.

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San Francisco, CA 94104
Support: 855.401.4357

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© 2023 Ubiquity Retirement + Savings
Privacy Policy
Do not sell my info
44 Montgomery Street, Suite 300
San Francisco, CA 94104
Support: 855.401.4357

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