Safe Harbor IRA
A Safe Harbor IRA is a type of retirement account your employer can open for you when you leave a job. If your 401(k) balance is under $7,000 and you don’t move it within 30 - 60 days, your employer can transfer it out of active management and into a Safe Harbor IRA as part of a process called an automatic rollover. The idea is to keep your savings safe - without them having to foot the bill - but there are some things to watch out for like fees and how the money is invested.
Why Are Safe Harbor IRAs Used by Employers
In the past, employers had a hard time managing small retirement accounts left behind by former employees. It took extra time, money and resources. To solve this problem, in 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), which aimed to simplify and improve various aspects of retirement savings, including how employers handle small 401(k) balances. As of January 2024, the limit has been raised from $5,000 to $7,000, meaning more people’s savings could end up in these accounts.
How Do Safe Harbor IRAs Work
If you leave a job and have less than $7,000 in your 401(k), your employer will give you 30 - 60 days to decide what to do with it. If you don’t respond, your money gets rolled over into a Safe Harbor IRA.
The money in a Safe Harbor IRA is invested in a “safe” option, like a low-risk fund, to protect your original balance (also called the principal). While this keeps your money “safe”, it doesn’t always help it grow.
Things to Know About Safe Harbor IRAs
Safe Harbor IRAs are helpful for employers but they might not be the best fit for you. Here’s why:
- Unwanted Fees: Although fees for Safe Harbor IRAs are typically low, they can still reduce the account balance over time, especially for smaller savings.
- Limited Growth: The default investment options prioritize protecting the principal (your original investment) rather than growing your savings, which may not match your long-term retirement goals.
- Poor Communication: Participants may miss notifications about the force-out process, especially when the funds are from a previous job, leading to surprise or confusion when their savings are moved or sometimes hard to track down.
- More Accounts to Manage: Adding another account to your list of retirement savings can make it harder to keep track of everything.
