Key takeaways:

• Traditional 401(k) retirement plans allow for pre-tax contributions and tax-deferred growth
• Roth 401(k)s are funded with after-tax dollars and offer tax-free withdrawals in retirement*
• Solo 401(k)s may allow self-employed individuals to contribute as both employee and employer

Different types of 401(k) plans offer varying tax advantages and contribution rules; understanding these options may help people choose the plan that aligns with their financial goals.

A 401(k) is a retirement savings plan that’s sponsored by a person’s employer, allowing employees to direct a portion of their wages into a tax-advantaged investment account. These plans, introduced via the Revenue Act of 1978, have become a core component of workplace benefits in the decades since.¹ Today, 401(k) plans are a cornerstone of retirement saving in the U.S. 

Some employers may choose to include matching contributions to 401(k) plans. Employees decide how much to contribute each pay period, and an employer may match a portion of their contributions. How much an employer contributes may vary. The employer’s contributions may be made pre- or after-tax, depending on the 401(k) chosen. The IRS sets contribution limits for employee and employer deposits every year.²

Read more: How to understand your 401(k) plan

Traditional 401(k)

A traditional 401(k) is the most common plan type.³ Contributions are made using pre-tax dollars, which typically reduce taxable income for the year in which the contributions are made. Any investment gains are tax-deferred until withdrawn, at which point they are then taxed as ordinary income in retirement. Early withdrawals may result in fees and tax obligations.

Some employers may make matching contributions to what employees put into their 401(k) account. For instance, an employer may decide to make matching contributions up to 6% of an employee’s salary, either at a 100% match or less depending on the benefits package. These matching contributions may be subject to vesting, meaning employees must stay with the company for a period of time before they can fully own the funds. 

Traditional 401(k) accounts may benefit workers who expect to be in a lower tax bracket during retirement than they are today.⁴ In that case, the income taxes paid on withdrawals could be lower than the tax savings received at the time of contribution.⁵ Pre-tax contributions defer taxes until retirement, which may result in lower overall tax obligations depending on future income levels. 

In 2025, workers under 50 years of age can contribute up to $23,500. Those aged 50 and older can contribute an additional $7,500 per year as catch-up contributions. Those between the ages of 60-63 can contribute an additional $11,250 or more per year (depending on the employer’s plan).

Roth 401(k)

Roth 401(k)s are funded with after-tax dollars. Contributions do not reduce current taxable income, but qualified withdrawals in retirement are not subject to income taxes. As of 2024, Roth 401(k)s are no longer subject to required minimum distributions (RMDs) during the account holder's lifetime.⁶** These plans do not have income-based eligibility restrictions. Traditional 401(k)s may be suitable for those seeking tax breaks today, while Roth 401(k)s may appeal to those focused on tax-free income later.⁷ 

Employers can offer both traditional and Roth 401(k) retirement plans, and employees may be allowed to split contributions between them.⁸ Matching contributions on Roth accounts are typically made on a pre-tax basis and go into a separate traditional 401(k) sub-account, unless the plan specifically allows Roth matching. Beginning in 2026, however, employees age 50 or older with wages above IRS thresholds (currently $145,000 from the sponsoring employer) must make catch-up contributions to a Roth 401(k), if the plan offers one. Account limits still apply, however, so employees can spread money across accounts so long as they stay at the yearly IRS contribution limits.

Read more: Roth 401(k) vs. Roth IRA: Key differences

Solo 401(k)

A solo 401(k), also called an individual 401(k), is designed for self-employed individuals or business owners with no employees apart from a spouse. These plans allow contributions both as an employer and an employee, so a self-employed person could have more opportunities to invest and save.

In 2025, the combined employee and employer contributions can total up to $70,000, or $77,500 for those aged 50 and older. Solo 401(k)s may be either traditional or Roth and follow the same withdrawal and RMD rules as other plans.

Safe harbor 401(k)

A safe harbor 401(k) is structured to bypass IRS non-discrimination testing, which is designed to ensure benefits don't favor highly compensated employees. To qualify, employers must make mandatory contributions to employee accounts (either matching or nonelective) and those contributions must be 100% vested immediately. This means employees retain ownership of them even if they leave the company.

Choosing the right 401(k) for your situation

The right type of 401(k) retirement plan may depend on employment status, tax outlook and available benefits. Traditional 401(k)s may suit those seeking tax breaks today, while Roth 401(k)s may appeal to those focused on tax-free income later. Self-employed individuals may benefit from the higher contribution ceiling of a solo 401(k). Small employers may prefer the streamlined compliance rules of a safe harbor 401(k). Understanding the differences between plans can help workers choose an approach that fits their situation.

Read more: The average 401(k) balance by age

Conclusion

Choosing the right 401(k) plan depends on your financial situation, employment status, and long-term goals. Traditional 401(k)s could offer tax advantages today, Roth 401(k)s are designed for tax-free income in retirement, solo 401(k)s may provide flexibility for self-employed individuals, and safe harbor plans could simplify compliance for small businesses. Each option comes with contribution limits, distribution rules, and potential tax implications, so outcomes will vary by individual.

To better understand which plan may fit your needs, consider speaking with a licensed financial advisor. You can also explore Empower’s retirement calculator — an educational tool that allows you to model different scenarios — as part of your planning process.

Frequently asked questions

Here are a few commonly asked questions about the different types of 401(k) plans.

What is the difference between Roth and traditional 401(k)?

A traditional 401(k) offers pre-tax contributions and is tax-deferred until withdrawal. A Roth 401(k) is funded with after-tax dollars and allows tax-free withdrawals in retirement.

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

Yes, if both are offered by an employer, contributions can often be split between them. Annual IRS limits still apply to the combined total. 

What 401(k) option is available for self-employed workers?

Solo 401(k) plans may offer greater flexibility for self-employed individuals, allowing for higher contributions and full control over plan design.