A 401(k) plan is generally a company-sponsored retirement account where the employees contribute their income to, while employers may match contributions.
What Is a 401(k) Plan?
A 401(k) plan is a popular retirement savings plan offered by many employers in America. This retirement saving plan has tax advantages to the saver. 401(k) is named after a section of the U.S. Internal Revenue Code.
Employees signing up for a 401(k) agree to contribute a certain percentage of each paycheck to an investment account. The employer then may match some part or that entire contribution amount.
There are two different types of 401(k)s—traditional and Roth. They primarily differ in the way they are taxed.
A Roth 401(k) allows you to make after-tax contributions and then you get tax-free withdrawals at the time of retirement. Traditional 401(k)s, on the other hand, allow pre-tax contributions but the withdrawals in retirement are taxable.
Can I contribute to both a 401(k) and a Roth 401(k)?
Most employers offering both a Roth 401(k) and a traditional 401(k) let you switch between traditional & Roth 401(K) or even allow you to split your contributions. Your employer may match Roth 401(k) contributions. If your employer offers equal contribution, and you contribute to a Roth 401(k), then you will also have the opportunity to contribute to a traditional 401(k) because technically your employer will have to contribute the matching amount into a pretax account.
Safe Harbor 401(k)
The Safe Harbor 401(k) is a defined contribution salary-deferred retirement plan governed by Internal Revenue Code Section 401(k). It is beneficial for small businesses that have been reluctant to establish an employer plan due to low employee participation. Automatic enrollment is allowed.
Solo 401(k)
Solo 401(k) plans are available to businesses with only owners, highly compensated employees, or family members of the business owner. These plans help maximize contributions while being less costly to maintain than a traditional 401(k) plan.
403(b)
A 403(b) plan (also known as a Tax-Sheltered Annuity or a Tax-Deferred Annuity) allows salary deferral contributions either as pre-tax, after-tax, or Roth 403(b) contributions. 403(b) plans are available for employees of hospitals, schools, religious organizations, and 501(c)(3) non-profit organizations.
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