What's the difference between a traditional 401(k) and a Roth 401(k)?

Traditional 401(k)s are funded with deductible pre-tax contributions, but withdrawals are taxed as ordinary income in retirement. Conversely, Roth 401(k)s are funded with after-tax money, which grows tax-free, and withdrawals are not taxed in retirement.

Can I have both a traditional and Roth 401(k)?

Yes, but your contributions can run only up to their combined limit under IRS rules.

What is a safe harbor 401(k) and why would an employer offer it?

Small and midsize businesses offer safe harbor 401(k)s — a type of plan with mandatory employer matches and automatic vesting — to reduce IRS compliance and regulatory burdens.

How does a solo 401(k) work for the self-employed?

With solo 401(k)s, self-employed sole proprietors serve as both employer and employee, deducting a portion of their income and contributing another portion to an account with significantly higher contribution limits.

Is a SIMPLE 401(k) better than a SIMPLE IRA?

The two are similarly structured, but SIMPLE IRAs typically have more investment and fund choices.

Which type of 401(k) has the highest contribution limits?

Solo 401(k)s, with contribution limits up to $70,000 for those under 50, plus $7,500 in catch-up contributions for older savers in 2025, have the highest maximum limits.

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Types of 401(k) Plans: Which One Is Right for You?

August 14, 2025

5 min Read

Written by Andrew Lisa

Edited by Nupur Gambhir

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A 401(k) is a tax-advantaged, employer-based retirement account that makes it easier for workers to save for life beyond their working years. There are different types of 401(k) plans tailored to businesses of different sizes and employees with different tax needs and savings strategies and it’s crucial to understand the differences between them.

This guide will break down each type, who they’re best for, their benefits and drawbacks, and what to consider when choosing the one that’s right for you.

Overview of 401(k) Plans

401(k) plans exist to give workers a tax-advantaged means to save for their own retirements, unlike the pensions that they have largely replaced, which placed greater responsibility and cost on the employer.

They help employees by offering tax deductions for their contributions and tax-deferred growth on their earnings. Over time, that structure offers a powerful mechanism for fostering long-term compounding and growth, particularly when employers offer matching contributions, which many do to attract and retain talent.

Traditional 401(k)

Common among large employers, traditional 401(k)s are funded with pre-tax money taken directly from participating employees’ paychecks, which reduces their taxable income. Growth occurs tax-free, but withdrawals are taxed as ordinary income in retirement.

Therefore, traditional 401(k)s are best for those who expect to be in a lower tax bracket in retirement.

Roth 401(k)

Although Roth 401(k)s have been around for years, they still aren’t as well-known as traditional 401(k)s. In fact, a Plan Sponsor Council of America survey found that while 93% of workplace plans now offer a Roth option, only about one in five workers take advantage of it.

With a Roth 401(k), you contribute after-tax dollars, meaning your contributions aren’t deductible. The trade-off is that your money grows tax-free — and in retirement, qualified withdrawals are completely tax-free as well.

Because of this, Roth 401(k)s are best for those who expect a higher tax rate in retirement. They’re similar to Roth IRAs, but they have higher contribution limits, available employer matches, less early withdrawal flexibility and no income limits.

Safe Harbor 401(k)

Safe Harbor 401(k)s are designed to meet specific IRS compliance requirements and are ideal for employers who want to avoid annual nondiscrimination testing. They require employer contributions on either a match or a nonelective basis, and matching funds are immediately vested. Many small and midsize businesses offer them because they reduce administrative burdens.

Solo 401(k) (One-Participant 401(k))

Solo 401(k) plans, also known as one-participant 401(k) plans, are designed for self-employed individuals or business owners with no employees other than their spouse. They have higher contribution limits to compensate for a single individual making both employee and employer contributions.

Solo 401(k) plans, known for their flexible investment options, are ideal for freelancers, consultants, and sole proprietors.

SIMPLE 401(k)

SIMPLE 401(k) plans are a hybrid between traditional 401(k)s and SIMPLE IRAs. Designed for companies with fewer than 100 employees, they reduce administrative burdens for small businesses. Employers are required to make matching contributions, and the maximum contribution limits are lower than those for traditional and solo 401(k)s.

Tiered and Customized 401(k) Plans

These plans enable employers to offer different benefit levels to various employee groups, providing greater flexibility in tailoring their benefits to attract and retain high-value employees. They’re often paired with profit-sharing benefits.

Choosing the Right 401(k) for Your Needs

When deciding which kind of 401(k) is right for you, consider factors like:

Employer match
How your taxes now compare to your expected taxes in retirement
Investment options and fund choices
Fees

The self-employed have fewer options, while those who work for employers that offer 401(k)s must gain a thorough understanding of all available plans before making a decision. However, long-term saving, investing and planning should drive the decision.

Choosing the Right 401(k) for Your Retirement Goals

The type of 401(k) you choose can have a big impact on how much you save — and how much you keep after taxes. Consider your income, current and future tax rates, retirement goals, and job situation before deciding. If you’re unsure which option is best, a financial professional can help you make the most tax-efficient choice.

FAQ

What's the difference between a traditional 401(k) and a Roth 401(k)?
- Traditional 401(k)s are funded with deductible pre-tax contributions, but withdrawals are taxed as ordinary income in retirement. Conversely, Roth 401(k)s are funded with after-tax money, which grows tax-free, and withdrawals are not taxed in retirement.
Can I have both a traditional and Roth 401(k)?
- Yes, but your contributions can run only up to their combined limit under IRS rules.
What is a safe harbor 401(k) and why would an employer offer it?
- Small and midsize businesses offer safe harbor 401(k)s — a type of plan with mandatory employer matches and automatic vesting — to reduce IRS compliance and regulatory burdens.
How does a solo 401(k) work for the self-employed?
- With solo 401(k)s, self-employed sole proprietors serve as both employer and employee, deducting a portion of their income and contributing another portion to an account with significantly higher contribution limits.
Is a SIMPLE 401(k) better than a SIMPLE IRA?
- The two are similarly structured, but SIMPLE IRAs typically have more investment and fund choices.
Which type of 401(k) has the highest contribution limits?
- Solo 401(k)s, with contribution limits up to $70,000 for those under 50, plus $7,500 in catch-up contributions for older savers in 2025, have the highest maximum limits.