Safe Harbor 401K

If you are thinking about investing and putting money away into some type of investment, should you use Safe Harbor 401k accounts? To understand this you must first understand exactly what these accounts are, and how they differ from other 401k plans and investments. A Safe Harbor 401k is somewhat like a traditional 401k plan, only the employer has a requirement to make contributions for each individual employee. These contributions automatically become one hundred percent vested once the contribution is added to the account. Many employers use these plans to help ease any administrative problems because of the tax rules which are applied to traditional 401k plans.

Safe Harbor and traditional 401k plans both allow the employee and the employer to make contributions to the 401k account, and both can offer you flexibility when it comes to issues like distributing options, eligibility, and participant loans against the account. However, Safe Harbor 401k plans have a requirement that any contributions must be immediately vested one hundred percent. With traditional 401k plans, many times the employer contribution is vested over a period of years, normally five, with a certain amount being vested each year, usually twenty percent. Both 401k plans normally allow both the employer and the employee to make contributions to the retirement which have some tax advantages.

With Safe Harbor 401k plans, as the employee you can make rollover contributions, salary deferrals, and catch up contributions on a pre-tax basis, the same as traditional 401k plans. The difference between the two plans is that with a traditional 401k will allow discretionary contributions by your employer, and this is not allowed with a Safe Harbor 410k plan. Your employer must make fully vested contributions on your behalf, instead of contributions that are not vested or only partially vested. This means that your employer can not take back any of the contributions to your account, and once the contribution is made to your account it becomes your investment one hundred percent.

The administration of a Safe Harbor 401k plan is different than that of a traditional 401k plan. When the 401k plan is designated a Safe Harbor plan, this means that there is no requirement for discrimination testing as long as the employer sponsoring the plan meets the requirements for employer contributions to ensure the plan is broadly participated in throughout the company, and that the contributions are immediately vested at one hundred percent.
Tax Advantages

Safe Harbor 401k plans can be a great way to save for your retirement, and if your employer sponsors one of these 401k plans it is a good idea to join. The contributions are fully vested once they are made to the account, so there is no chance of your employer taking back part of the funds because of a job loss. The only disadvantage to Safe Harbor 401k plans may be to your employer, because companies that have high turnover rates may benefit from contributions which vest over a length of time. This allows your employer to get back some of the matching contributions if you do not stay in their employ for the specified length of time to become fully vested. Not all 401k plans have the option of Safe Harbor administration, but if your employer sponsored 401k plan has Safe Harbor administration, this is a benefit to you and should be utilized.


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