Beginner’s Guide to the Types of 401(k)s

Employers have a range of choices when they set up a retirement plan

The major types of 401(k) plans are traditional 401(k)s and Roth 401(k)s. Smaller employers may offer you a SIMPLE retirement account, or a safe harbor 401(k) plan. If you're an entrepreneur, you may be able to set up your own 401(k) account, too. These types of 401(k) plans have grown in popularity and access since the introduction of the 401(k) plan in the late 1970s and early ’80s. Nowadays, at least 60 million workers participate in this type of retirement savings account. Learn more about these types to decide which is right for you.

Key Takeaways

  • Traditional and Roth 401(k)s may be the most common types of retirement plans, often offered at large employers.
  • Smaller employers may favor SIMPLE (Savings Incentive Match PLan for Employees) and safe harbor 401(k) plans, which can be less complex and costly to administer.
  • Solo entrepreneurs can also set up a 401(k) just for themselves.

5 Types of 401(k)s and How They Work

All 401(k)s are defined contribution plans, funded by employee (and sometimes employer) contributions. Traditional pensions, by contrast, are defined benefit plans, funded entirely by employers and promising the employee a set benefit at retirement based on their salary, years of service, and other factors. With a 401(k), the amount of money that employees will have available for retirement is determined by how much they contributed to the plan and how well the investments within their account have performed over the years.

There are several different types of 401(k) plans. These are the ones you are most likely to encounter as either an employee or an employer: 

Traditional 401(k)

This is what most people probably think of as a 401(k). The employee contributes money to their account each pay period, usually through regular payroll deductions. That money goes into the investments, typically mutual funds, that they’ve chosen from the plan’s offerings.

The maximum that employees can contribute is set by law. For 2023, it is $22,500 a year for anyone under age 50 or $29,000 for those 50 and older. On top of that, many employers will make a matching contribution, such as 50 cents per dollar of the employee’s first $6,000 in salary, or $3,000 a year.

The money that the employee contributes is not immediately taxed. So, for example, an employee who makes $50,000 a year and contributes $10,000 to their 401(k) plan will pay income taxes only on $40,000 of their income that year. The account’s earnings will also grow tax deferred until they’re eventually withdrawn.

When the employee makes withdrawals (often referred to as distributions) from the account, that money will be taxed as regular income. In addition, because 401(k)s are intended for retirement, employees generally can’t withdraw money before age 59½ without paying tax penalties. There are, however, some exceptions to that rule.

Traditional 401(k) plans are also subject to required minimum distribution (RMD) rules. Under the current rules, account owners must take RMDs each year, now starting at age 73. Your year of birth may mean that your RMDs started earlier. Internal Revenue Service (IRS) Publication 590-B has tables and worksheets that account owners can use to calculate their RMDs. 


In addition to 401(k)s, other types of defined contribution retirement plans include 403(b) plans for schools and nonprofits, 457 plans for government workers, and profit-sharing plans in the corporate world.

Roth 401(k)

The Roth 401(k), sometimes called a designated Roth account, is like a traditional 401(k) but with one key difference: Contributions don’t receive an up-front tax break, but withdrawals will be tax free if the employee meets certain requirements. Specifically, they must generally be 59½ or older and have had the Roth account for at least five years; however, as with traditional 401(k)s, there are exceptions. Contributions to a Roth 401(k)—as opposed to the account’s earnings—can be withdrawn tax free at any time because they have already been taxed.

Some employers offer both traditional and Roth 401(k) options. Employees can, if they wish, split their contributions between the two types, but their maximum total contribution (in 2023) can’t exceed $22,500 a year for anyone under age 50 or $29,000 for those 50 and older.  

Roth 401(k)s are currently subject to the same RMD rules as traditional 401(k)s, described above. (Roth IRAs, by contrast, aren’t subject to RMDs during the account owner’s lifetime.) However, starting in 2024, RMDs will no longer be required from designated Roth 401(k)s during the owner’s lifetime, as part of the SECURE 2.0 Act of 2022.

SIMPLE 401(k)

SIMPLE 401(k) plans are designed for small businesses with 100 or fewer employees. SIMPLE is an acronym for Savings Incentive Match PLan for Employees.

With a SIMPLE 401(k) plan, employees can contribute up to $15,500 (in 2023) if they’re under age 50 or $19,000 if they’re 50 and older. As with a traditional 401(k), that money isn’t taxed as income until it’s eventually withdrawn from the plan.

The employer must make either a matching contribution of up to 3% of each employee’s pay for those who contribute to the plan or a nonelective contribution of 2% for all eligible employees, regardless of whether they participate in the plan.

Like traditional and Roth 401(k)s, SIMPLE 401(k)s can be subject to early withdrawal penalties before age 59½ and to required minimum distributions after age 70½ or 72.

Safe Harbor 401(k)

Safe harbor is a legal term for a provision in the law that exempts a person or company from certain regulations if they meet other requirements. A safe harbor 401(k) allows employers to skip the nondiscrimination tests that most 401(k) plans are subject to. Nondiscrimination tests are intended to ensure that plans do not discriminate in favor of highly compensated employees in terms of employer matches or other benefits. Because safe harbor 401(k)s are easier to administer, they are especially popular with small businesses.

In return, employers with safe harbor 401(k)s must make annual contributions to every eligible employee’s plan, regardless of whether the employees themselves contribute. In addition, that money is immediately vested, regardless of how long the employee has been with the

(Other types of 401(k) plans often have vesting requirements for their employer contributions, while employee contributions are always immediately vested.)

Employers can make their required contributions in one of three ways:

  1. Nonelective contribution: The employer contributes an amount equal to 3% of compensation on behalf of each non-highly compensated employee. Employees are not required to contribute.
  2. Basic match: The employer matches 100% of each non-highly compensated employee’s elective contributions, up to 3% of their compensation. Also, it matches 50% of the next 2% in compensation. So, for example, an employee who earns $50,000 a year would be eligible for a maximum match of $2,000 (100% of their first $1,500 in contributions plus 50% of the next $1,000).
  3. Enhanced match: The employer can base its match on up to 6% of the employee’s compensation, rather than just 5%, as with a basic match.

Aside from those differences, safe harbor 401(k)s work much like any other 401(k) and are subject to the same rules on contributions, early withdrawals, and required minimum distributions.  


If you have multiple 401(k) plans, such as one with an employer and another for your own small business, your total contributions can’t exceed the maximum for a single 401(k) plan.

One-Participant 401(k) 

These plans go by a variety of names, including solo 401(k), individual 401(k), and self-employed 401(k). They are designed for businesses with no employees other than the owner, plus their spouse if that person also works in the business.

Because the owner is considered both an employer and an employee of the business, they can contribute to the plan in both capacities.

As employees, they can contribute up to 100% of their compensation or net income from self-employment, with the same annual contribution limit as traditional and Roth 401(k) plans: $22,500 a year for anyone under age 50 or $30,000 for those 50 and older (in 2023).

As their own employers, they can also make additional, nonelective contributions. The maximum depends on how their business is set up for tax purposes (S corporation vs. self-employed sole proprietor, for example).

In total, as employer and employee, the business owner can contribute as much as $66,000 to their 401(k) plan (for 2023), plus another $7,500 if they’re 50 or older.

Spouses who earn income from the business can also contribute to a one-participant 401(k), up to the same maximums, and they are eligible for the same additional employer contribution.

One-participant 401(k)s can be either traditional or Roth plans and are subject to the same rules as those plans for early withdrawals and required minimum distributions.

Other Retirement Savings Vehicles

If you do not have the option to open a 401(k) account, there are still ways you can save for retirement. Individual retirement accounts (IRAs) offer both a traditional option and a Roth option, similar to the 401(k) plans mentioned above. You can open an IRA on your own with a broker and potentially get a tax deduction for contributing every year.

Additionally, health savings accounts (HSAs) may be offered through your employer's health insurance program. An HSA is a place where you can save pre-tax money every month and use it for medical expenses. It's often paired with a high-deductible health plan and is a tax-advantaged account that can also be a smart retirement savings account. That's because you can invest the funds in an HSA similar to how you would a 401(k) or IRA. You can also leave the funds in there and roll them over year to year if you don't use them. And when you reach a certain age, you can use the money in your HSA for other expenses, not just qualified medical expenses.

Can You Have Both a 401(k) Plan and an Individual Retirement Account (IRA)?

Yes, you can contribute to both a 401(k) plan at work and an individual retirement account (IRA) on your own. However, if either you or your spouse has a 401(k) plan, your IRA contributions may not be tax deductible.

How Does Vesting Work in a 401(k) Plan?

Employee contributions to a 401(k) plan vest immediately, meaning that they belong to the employee from day one. Employer matching contributions can work differently, depending on the type of plan. With some types, such as safe harbor 401(k)s, matching contributions vest right away. With other types, such as traditional 401(k)s, employers can set different rules if they wish to. For example, the employer match might vest only after three years of service or vest gradually over a six-year period.

What Is Automatic Enrollment, and How Does It Work?

Automatic enrollment is a provision in some 401(k) plans that allows employers to defer a portion of an employee’s wages and deposit the money into a 401(k) account on their behalf. Employees can opt out if they wish to do so. Plans with this provision are sometimes referred to as automatic enrollment 401(k)s. Automatic enrollment (with an opt-out provision for those who don’t want to join) is mandatory for newly created 401(k) plans for plan years beginning after Dec. 31, 2024.

Are 401(k) Plans Federally Insured?

No, unlike most bank and credit union accounts in the U.S., 401(k) plans are not covered by the FDIC. While you save money in a 401(k), it's also invested, and investments are always subject to losses; gains are never guaranteed.

The Bottom Line

There are several types of 401(k) plans that employers may offer their workers. Traditional plans are most common among larger employers, while SIMPLE and safe harbor plans are often found at small businesses. Business owners without other employees can also open one-participant 401(k) plans. These plans are similar in certain respects but different in others.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Employee Benefit Research Institute. “History of 401(k) Plans: An Update,” Pages 1–2 and 5.

  2. Investment Company Institute. “Frequently Asked Questions About 401(k) Plan Research.”

  3. U.S. Department of Labor. “Types of Retirement Plans.”

  4. Financial Industry Regulatory Authority. “Contributing to Your 401(k) Plan.”

  5. Financial Industry Regulatory Authority. “Investing in Your 401(k).”

  6. Internal Revenue Service. “Retirement Topics—401(k) and Profit-Sharing Plan Contribution Limits.”

  7. Vanguard, Institutional Investors. “How America Saves 2022,” Pages 17 and 20 (Pages 19 and 22 of PDF).

  8. Financial Industry Regulatory Authority. “401(k) Basics.”

  9. Internal Revenue Service. “Retirement Topics—Exceptions to Tax on Early Distributions.”

  10. U.S. Senate Committee on Finance. “SECURE 2.0 Act of 2022 Summary,” Page 2.

  11. Internal Revenue Service. “Retirement Topics—Required Minimum Distributions (RMDs).”

  12. Internal Revenue Service. “Roth Account in Your Retirement Plan.”

  13. Internal Revenue Service. “Retirement Plan and IRA Required Minimum Distributions FAQs,” select “What types of retirement plans require minimum distributions?”

  14. U.S. Senate Committee on Finance. “SECURE 2.0 Act of 2022 Summary,” Page 13.

  15. Internal Revenue Service. “SIMPLE IRA Plan.”

  16. Internal Revenue Service. “Choosing a Retirement Plan: SIMPLE 401(k) Plan.”

  17. Internal Revenue Service. “401(k) Plan Overview.”

  18. Internal Revenue Service. “Retirement Topics—Vesting.”

  19. Internal Revenue Service. “401(k) Plan Fix-It Guide—401(k) Plan—Overview.”

  20. Internal Revenue Service. “How Much Salary Can You Defer If You’re Eligible for More Than One Retirement Plan?

  21. Internal Revenue Service. “One-Participant 401(k) Plans.”

  22. TD Ameritrade. “What Is a Solo 401(k)?

  23. Fidelity. "5 Ways HSAs Can Help With Your Retirement."

  24. Internal Revenue Service. “IRA Deduction Limits.”

  25. Internal Revenue Service. “Retirement Topics—IRA Contribution Limits.”

  26. Internal Revenue Service. “FAQs—Auto Enrollment—What Is an Automatic Contribution Arrangement in a Retirement Plan?

  27. U.S. Senate Committee on Finance. “SECURE 2.0 Act of 2022 Summary,” Page 1.

Take the Next Step to Invest
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.