Retirement cuts the bulky income source! It also means no money or very less money for most of the retired people today. Realizing the fact, many smart Americans are now becoming extremely cautious about their retired life and their retirement plans. Numerous accounts are available for Americans to prepare their retirement. One such account an individual uses today is the Traditional 401(k) account, which allows employees to contribute a small section of their salary to their retirement account. The employer also contributes in to the individual’s account, building up the funds quickly.

Like the traditional 401(k) plans, Safe Harbor 401(k) plans are also company sponsored retirement plans that provide the same type of benefits as a traditional 401(k) plan. Essentially a safe harbor 401(k) plan is a traditional 401(k) plan with some changes or added features. The following are the similarities and differences of a safe harbor 401(k) plan with regards to a traditional 401(k) plan.

Safe harbor 401(k) plan works on the same principle as traditional 401(k) plan where an eligible employee can contribute pre-tax deferrals to their safe harbor 401(k) account. The contribution limits for a safe harbor 401(k) plan are also same as a traditional 401(k) plan.

The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 made provision for creating the Individual 401(k) plan which has turned out to be quite an exciting plan for self employed individuals. The tax law that created the plan became effective from January 2002. The individual 401(k) plan is essentially a traditional 401(k) plan with some relaxation in the rules and regulations. This plan can be opted for only by self employed individuals. The individual 401(k) plan is also popularly known as solo 401(k), solo k or individual k.

With this plan, self employed business owners can save for their retirement by making tax deferred contributions and profit sharing contributions to their individual 401(k) account. What sets this plan apart from

The contributions made to a 401(k) account are made of tax deferred dollars. This means that contributions made from the employee’s paycheck are added to the 401(k) account before the pay is taxed. These funds from the account are then invested into various investment vehicles which impart growth to the employee’s money. The funds are taxed only when they are withdrawn from the account. But there are limitations to when an employee can withdraw funds from their account. Overstepping these limitations can result in severe penalties and taxes. Hence, when thinking of a withdrawal from one’s 401(k) account, one must exercise caution. Also the rules for withdrawal vary with the employee’s age and employment status.