Types of 401K Retirement Plan
There are four main categories of 401K retirement plans, organized by their funding and management structures.
Main Categories
- Traditional 401K — a tax-deferred plan where employees contribute pre-tax dollars, reducing their taxable income, and the employer may match contributions, as seen in IBM's traditional 401K plan, which offers a 6% company match.
- Safe Harbor 401K — a type of plan that requires the employer to make mandatory contributions to employees' accounts, either through a match or a non-elective contribution, such as Microsoft's safe harbor 401K plan, which provides a 4% non-elective contribution.
- Solo 401K — a plan designed for self-employed individuals or small business owners with no employees, allowing them to make tax-deductible contributions as both the employer and employee, as used by Warren Buffett's solo 401K plan for his solo business ventures.
- Roth 401K — a plan where employees contribute after-tax dollars, and the funds grow tax-free, with Walmart's Roth 401K plan offering employees the option to contribute to a Roth account.
Comparison Table
| Category | Funding Structure | Employer Contribution Requirement | Investment Options |
|---|---|---|---|
| Traditional 401K | Employee pre-tax contributions, optional employer match | No requirement | Typically a range of mutual funds and target-date funds |
| Safe Harbor 401K | Employee pre-tax contributions, mandatory employer contributions | Employer must contribute 3% or 4% of employee compensation | Similar to traditional 401K |
| Solo 401K | Self-employed individual or small business owner contributions | No requirement, but can make deductible contributions as employer | Often includes a range of investment options, including real estate and cryptocurrencies |
| Roth 401K | Employee after-tax contributions | No requirement | Similar to traditional 401K, with possible inclusion of Roth-specific investment options |
How They Relate
The categories often overlap, as employers may offer multiple types of 401K plans, such as a traditional 401K and a Roth 401K. For example, Google's 401K plan offers both traditional and Roth options, allowing employees to choose which type of account to contribute to. The Solo 401K and Traditional 401K plans are commonly confused, as both offer tax-deferred growth, but the solo 401K is designed specifically for self-employed individuals or small business owners. In contrast, Safe Harbor 401K and Traditional 401K plans are distinct due to the mandatory employer contribution requirement in safe harbor plans, which can reduce the administrative burden for employers, as seen in Apple's safe harbor 401K plan.