FAQs about 401k - Ubiquity

What’s the definition of a 401k?

Business owners, including those who are self-employed, can start a 401k plan for themselves and their employees, if applicable. A 401k plan enables businesses to meet retirement planning and saving goals while taking advantage of business and personal tax benefits. With a Ubiquity 401k plan, retirement contributions can be either pre- or post-tax, with funds being deposited directly from an employee's paycheck each pay period. Many companies also match a portion of their employees’ contributions.

I’m self-employed. How can a retirement 401k help me?

A solo 401k plan, is designed to provide all the benefits of a big 401k plan, including maximum tax savings for self-employed individuals with no full-time employees other than the business owner and a spouse, if applicable.

What are the differences between a 401k and Roth IRA retirement plans?

The major differences between a traditional pre-tax 401k and a post-tax Roth IRA are around contribution maximums, taxes, and investment options. Since individuals open Roth IRAs directly with an investment firm, there are no employer contributions. Also, Roth IRAs are funded with post-tax income, so employees don’t pay income taxes when they withdraw the amount they deposited and any accrued interest after they retire. And finally, since participants manage the Roth IRA themselves, their investment choices can be broader than with a pre-tax 401k.

Roth IRA contribution limits are much lower than the limits of pre-tax 401k plans. In 2018, the maximum annual contribution to a Roth IRA is $5,500 for those under age 50 and $6,500 for those 50 and up. Also, individuals earning more than $133,000 per year ($196,000 for couples) can’t contribute to a Roth IRA.

In 2018, participants can save up to $18,500 of their pre-tax pay in a traditional 401k – those 50 or older can contribute $24,500. With a 401k plan, businesses can choose to make matching or profit-sharing contributions, but the total combined amount cannot be greater than an employee’s income for the year. For 2018, the maximum is $54,500.

I’m a small business owner. Why should I offer my employees a 401k?

Saving in a 401k provides several benefits to business owners and their employees, as well as those who are self-employed. In addition to providing a more financially secure future upon retirement, there are many tax benefits. For example, with a traditional pre-tax 401k, contributions are taken directly from payroll before income taxes are withheld, which lowers an individual or business owner's taxable income for that year.

What’s a Safe Harbor Plan?

Each year, a 401k plan needs to pass specific tests designed to keep it from becoming a plan that unfairly benefits the company’s high-earning employees. If the 401k fails these tests, the business owner can move to a Safe Harbor 401k plan, which allows the plan to bypass these tests in exchange for additional contributions from the business owner. Additionally, with a Safe Harbor 401k plan, business owners and any highly-compensated employees can maximize their contributions instead of being limited by the amount lower-paid employees contribute.

What’s the difference between 401k pre-tax contributions and Roth contributions?

The main difference between traditional and Roth 401(k) is how contributions are made. Traditional 401(k)s are funded with pre-tax deductions while Roth 401(k)s fund with post-tax contributions.

How can a 401k-retirement plan help small businesses?