401K

Types of 401(k) Plans

There are many different types of 401(k) plans, and the right one for you depends on your employment situation, your tax preferences, and more. There are also different rules and regulations that govern each plan. Explore your options below to find some of the most common 401(k) plans.

The Most Common 401(k) Plans

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    Traditional 401(k) A traditional 401(k) is an employer-sponsored plan, and it’s one of the most common retirement plans available. With this option, employee contributions (and earnings from the investments) are not taxed. You only have to pay taxes once you start drawing from the account. An added benefit of this plan is that some employers will match a portion of your contributions.
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    Roth 401(k) An employer-sponsored Roth 401(k) is very similar to a traditional 401(k). The major difference is that employee contributions are made with after-tax dollars. As a result, any income earned on the account is not taxed. This means that you can withdraw tax-free earnings during your retirement years.
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    Solo 401(k)/Self Employed 401(k) A solo 401(k) is an excellent option for self-employed workers. Known by the IRS as a “one-participant 401(k),” this plan is very similar to employer-sponsored plans. You can even choose between a traditional or Roth 401(k) as a self-employed worker. The main difference is that you can make contributions as an employee and as an employer, if you’re a business owner.
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    Safe Harbor 401(k) A safe harbor 401(k) is similar to a traditional 401(k) plan with employer-matched contributions. However, if the 401(k) has a Safe Harbor provision, then the employer must make annual contributions on behalf of employees, and the contributions are vested immediately.
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    Simple 401(k) A Simple 401(k) offers many features of the traditional 401(k), but employee contributions have a lower annual cap. Contributions are also fully vested, and this plan doesn’t carry the non-discrimination rules that a traditional 401(k) does. On the employer side, it’s ideal for smaller companies that can’t take on larger retirement plans.
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    Profit Sharing Plans A Profit Sharing Plan is a type of 401(k) where employees are given shares of profits from their employer. In other words, the employee receives a percentage of the company’s profits (in either cash or stock) based on quarterly or annual earnings of the company. Unlike most 401(k) plans that allow employee contributions, a Profit Sharing Plan only permits employer contributions.

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