Category: Business

Find easy to understand Business Information relating to 401(k) plans and from Ubiquity Retirement + Savings. Find easy to understand rules and regulations, along with tips and advice from our team of 401(k) business experts. Call Ubiquity today for a Free Consultation at 855.466.5825.

4 Tips for 401(k) Administration in 2021

Siân Killingsworth / 21 Jun 2021 / Business

401k Plan administration in 2021

As the economy continues its gradual recovery and Americans look forward with cautious optimism to the end of the pandemic, many have questions about the right moves to make with their retirement savings plan. Here are some tips for how to maximize your 401(k) in 2021.

1. Use a retirement calculator to make sure you’re saving enough.

If you’re in the dark about your 401(k) plan, check your most recent 401(k) statement, which may be on paper or delivered electronically. If you don’t have one of these statements handy, ask your Human Resources Department or investment manager. Then you’ll have the information you need to use an online tool – like Ubiquity’s 401(k) calculator – to see the possibilities.

  • What will your savings be when you retire?
  • How much should you be saving for retirement to live the lifestyle you desire?
  • If you put away a little more each pay period, how big an impact will it have years later?
  • What happens if you withdraw some of your retirement savings early?

All these questions can be answered in just a few minutes with a free online retirement calculator.

2. Mitigate risk of CARES Act borrowing.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was the rescue plan many Americans needed in 2020, but it was not free money. The CARES Act allowed qualified individuals to withdraw up to $100,000 from their 401(k) plans, penalty-free and authorized delayed repayments (within three years). Normally an early withdrawal would incur a 10% penalty. It also increased the amount a person could borrow (the lesser of $100,000 or up to 100% of the balance). However, it is important to remember income tax is still due on the withdrawal, though the bill can be minimized or delayed.

If you took advantage of the CARES Act retirement withdrawal in 2020, here’s what you need to do:

  • Start paying your taxes. Report one-third of the distribution on your income tax returns for 2021, 2022, and 2023. So if you borrowed $9,000, you’d pay taxes on $3,000 worth of the distribution over the next three years. This could be the best option if you’re still struggling financially.
  • Avoid having to pay taxes at all. If you can put the money back into your account over the next three years, you can avoid paying taxes on your withdrawal. If you took out $9,000, you could repay $3,000 back into your account in 2021, 2022, and 2023 – and you’ll owe $0 in taxes. This is the best option if you’ve recovered from the financial hit of the COVID-19 pandemic.
  • File an amended tax return. It’s still possible to avoid paying taxes, even if there is great uncertainty this year. Start by paying a third of your tax obligation. If by 2023 you are able to repay your account, you can file an amended return and get the taxes you’ve paid returned in a refund from the IRS.
  • Pay the whole bill up front. If your income for the year is very low, putting you into a lower tax bracket, it might be more advantageous to pay the entire tax bill this year. Some people went from a 22% tax rate down to 12% due to unemployment. In that case, it could mean a $900 tax bill difference on that $9,000 borrowed.

Failure to take care of the IRS obligations of CARES Act borrowing will result in a surprise tax bill in 2023 and hefty penalties that accumulate month after month.

Please note: Ubiquity is not a tax advisor and does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only.. 

3. Contribute more to your 401(k) plan.

Even if you do not have the financial resources to comfortably reach the $19,500 maximum 401(k) contribution for 2021, there are still a number of ways you can contribute more to your retirement this year:

  • Aim to contribute 1-5% more each pay period.
  • Increase your contribution when you get a bonus or a raise.
  • Make sure you can at least reach the company match (if applicable) as this is free money that can double savings.
  • Plan participants 50 years of age or older can contribute an additional $6,500 above this maximum limit to catchup in 2021.

4. Review your plan fees.

Fees can eat away at your portfolio balance over time. You may not have full say over investment fees if your employer manages your plan. If you have a small business 401(k) or solo 401(k), you could be overpaying for your plan administration. The lowest-cost plans, like Ubiquity’s, assess a low, flat, monthly fee for service. However, some 401(k) administrators charge per eligible participant or a percentage as an Assets Under Management (AUM) fee that puts more money in the administrator’s pocket as your balance grows over time. Administrators and investment managers can also charge expensive fund trading fees or loan servicing fees.

One way to bring down the cost is to request that your plan manager add low-cost index funds and ETFs as investment options; investing in funds with low annual fees could potentially boost a nest egg by hundreds of thousands of dollars by retirement time.

Locate your plan’s summary annual report and look under the basic financial statement section to see the total plan expenses and benefits paid. Subtracting the benefits paid from the total plan expenses will give you an idea of what you’re paying for administration. If you divide that number by the total value of the plan, you’ll see your administrative cost percentage. The average American pays between 0.37% and 1.42% in plan fees. If you’re paying a percentage that’s too high, it’s time to consider switching your 401(k) plan administrator. Call Ubiquity today to see how we can help.

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

Siân Killingsworth / 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.

Answer a few simple questions to find the optimal plan for you and your small business.

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 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.

401(k) Plans Share in Green Investment Options

Siân Killingsworth / 5 Mar 2021 / Business

Socially Responsible Investing- Ubiquity

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

Can My Spouse Participate in My Solo 401(k)?

Siân Killingsworth / 10 Dec 2020 / Business

Self employed spouses working together and saving for retirement under a solo 401k plan

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

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

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

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

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

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

Get Your Complimentary Guide to Solo 401(k) plans

Download

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.

Answer a few simple questions to find the optimal plan for you and your small business.

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.

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

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

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

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

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

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

Are you ready to retire?

Get Started

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

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

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

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

Generous contribution allowances will help you save for retirement.

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

You’ll start compounding interest sooner rather than later.

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

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

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

You had a particularly profitable year.

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

You want to get on track for next year.

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

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

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

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

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

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

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

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

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

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

Planning for the 2021 Plan Year

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

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

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

Self Employed business woman at desk

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

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

Please note: Ubiquity Retirement + Savings is not a tax advisor and does not provide tax advice. This material has been prepared for informational purposes only–please consult a CPA or your tax advisor with specific questions and guidance.  

Clearing Up Solo 401(k) Confusion

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

Get Your Complimentary Guide to Solo 401(k) plans

Download

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

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

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

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

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

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

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

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

Answer a few simple questions to find the optimal plan for you and your small business.

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.

What If You Have a Roth?

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

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

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

Are you ready to retire?

Get Started

2020 Solo 401(k) Contribution Deadline

Siân Killingsworth / 9 Nov 2020 / Business

deadline calendar

The 2020 tax year has shifted the deadline for when sole proprietors can start Solo 401(k) plans and how long they have to contribute.

Previously, you would have had until December 31, 2020, to establish your Solo 401(k) plan, which would allow you until April 15, 2021 (the Tax Filing Deadline) to make contributions. Now, Solo 401(k)s can be established up until the tax filling deadline–which for sole proprietors has been extended until May, 17 2021.

The New 2020 Solo 401(k) Setup Deadline for Sole Proprietors is  5/17/21

Your business must adopt a new Solo 401(k) by your tax deadline, in order to make 2020 contributions.

  • Sole Proprietors: 5/17/21 (unless you’ve filed an extension)
  • Partnerships: 3/15/21 (unless you’ve filed an extension.

If you haven’t adopted a Solo 401(k) yet, you should start now so your documents will be completed, and you can spread out your contributions over the next six months. If you establish a plan in 2021 for tax year 2020, you are past the deadline to make salary deferral contributions as an “employee”–but that doesn’t mean you can’t contribute to your plan.

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

Get Your Complimentary Guide to Solo 401(k) plans

Download

Deadline Extended for Existing Solo 401(k)s

If you had a sole proprietorship Solo 401(k) in 2020, the contribution deadline is May 17, 2021. If you had an S-corp or partnership LLC, the deadline is March 15, 2021. Both of these deadlines could be extended another six months (until September or October 2021) by filing an extension request. This is a huge benefit for people who want to make 2020 contributions but won’t have the funds available until later in the year.

What You Should Be Doing Now to Prepare

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

Answer a few simple questions to find the optimal plan for you and your small business.

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.

Solo 401(k) Contributions Example

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

Josephine is 33 years old and set up a sole proprietorship Solo 401(k) for her housekeeping business in 2020. Josephine paid herself a wage of $50,000 for the year. She hasn’t made her contributions yet, but she wants to now to reduce her taxable income for the year and save for retirement. She can max out her 2020 Solo 401(k) contribution limit by:

  • Contributing as an Employee

    Josephine plans to save $19,500 by the tax filing deadline of May 18, 2021, which will reduce her W2 taxable income from $50,000 to $30,500. Assuming she is in a 20% federal tax bracket and a 5% state tax bracket, she’d save $4,450 in tax liability for the year AND setup a considerable nest egg that will compound interest for the next 30+ years. Way to go, Josephine!

  • Contributing as an Employer

    Josephine can save up to 25% of wage compensation not to exceed $57,000 as an employer profit sharing contribution. Since Josephine has taken a wage of $50,000, the company can make a 25% contribution of $12,500. The company lists this employee benefit expense on the tax return.

    All considered, Josephine contributed $32,000 for retirement ($19,500 as employee, $12,500 as employer) and paid less in federal and state taxes as both an individual and as a business. That’s a pretty great deal!

If you’d like to maximize your savings, then now is the ideal time to begin coordinating with your accountant and 401(k) plan provider.

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

Are you ready to retire?

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Best 401k for the Self-Employed

Siân Killingsworth / 5 Nov 2020 / Business

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

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

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

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

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

  • Who is eligible:

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

  • How much you can save:

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

  • Tax advantage:

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

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Alternatives to the Solo 401k for Self-Employed Workers

Other retirement savings options for self-employed include:

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

How to Set Up a Solo 401k

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

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

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

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

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Why Now is a Good Time to Start a 401(k)

Siân Killingsworth / 4 Aug 2020 / Business

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

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

Here’s why:

It’s a buyer’s market.

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

The economy will bounce back.

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

There are short-term savings to consider.

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

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

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

There are long-term benefits, too.

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

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

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

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

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

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

Read Ubiquity's Guide to Small Business 401(k) Plans
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Schedule a Free Consultation

Contact Support
Visit our Help Center
support@myubiquity.com
Monday–Friday
6am–5pm PT / 9am–8pm ET

© 2024 Ubiquity Retirement + Savings
44 Montgomery Street, Suite 300
San Francisco, CA 94104