When you think of saving for retirement, one of the first options that comes to mind is a 401(k). Simply put, a 401(k) is an employer-sponsored retirement savings plan that allows employees to contribute a portion of their salary without having to pay tax on the amount. Taxes are only paid on your contributions once you take money out of the 401(k). This allows you to save more money during your working career. While all 401(k)s operate in mostly the same way, there are some differences that you should be aware of in order to fully understand the retirement savings plan you’ve enrolled in.


Traditional 401(k)

The traditional 401(k) is by far the most common type of retirement plan we see at Black Harbor Wealth Management and is offered by many employers, regardless of size or industry. This plan allows employees to contribute part of their paycheck to their retirement savings through simple payroll deductions. In addition to individual contributions, traditional 401(k)s allow employers to match the contribution if they desire to do so. Employer contributions are not always immediately vested and may be subject to a vesting schedule that identifies when the employee owns 100 percent of the employer contribution. This means that if you terminate your relationship with your employer, you are not guaranteed to receive the full unvested portion of your employer’s contributions. However, 100 percent of the contributions you make will belong to you when you leave the company


SIMPLE 401(k)

A SIMPLE 401(k) is geared for businesses with under 100 employees. These plans carry different rules than the traditional 401(k) plans. The employer is required to make contributions to an employee’s 401(k). SIMPLE 401(k)s have lower contribution limits than traditional plans, restricting the amount of money you can save towards your retirement. For 2016, the contribution limit for employees is set at $12,500 per year. The traditional 401(k) has an employee-contribution limit of $18,000. When you enroll in a SIMPLE 401(k), you are not allowed to receive contributions from your employer to any other retirement savings plan, however all contributions the employer makes to the SIMPLE 401(k) are fully vested, meaning all the money contributed to the 401(k) is yours, should you leave your position.


Safe Harbor 401(k)

A Safe Harbor 401(k) is similar to a traditional 401(k), but is optimized for small businesses. This plan allows you to make the full maximum contribution as a traditional 401(k), but also requires that your employer matches a percentage of your contributions. The contributions are immediately vested, just like the SIMPLE 401(k), meaning you own all of the funds in your 401(k) account and are entitled to all of it when you terminate your relationship with the company. The IRS has set a employee-contribution limit of $18,000 for 2016.


A 401(k) is the easiest way to start saving for your retirement and it’s best to start earlier in your career. While it’s never too early to start saving for your future, but strategies do change as you near the age of retirement. Our retirement planning experts will help you take the guesswork out of retirement planning. We’ll help you identify your goals and develop a strategy to allow you to enjoy your retirement. At Black Harbor Wealth Management, we understand that each individual has different needs and goals. Our approach is to give you the individualized attention you deserve. Call us today and schedule your complimentary consultation.