Key takeaways

  • There are several types of 401(k)s. Traditional, Roth, Safe Harbor, Solo, and SIMPLE 401(k)s; each playing by its own rules. And the differences matter a lot when it comes to taxes, contribution limits, and what the employer is on the hook for.
  • The traditional 401(k) is the most common type. Contributions go in before taxes, the balance grows without being taxed, and taxes are paid when distributions are taken out in retirement. 
  • A Roth 401(k) flips that whole tax sequence. Contributions are made with after-tax dollars, but distributions in retirement (including all investment growth) come out completely tax-free.
  • Solo 401(k)s are designed specifically for self-employed individuals with no employees. The distinguishing feature is that the account holder can contribute as both the employee and the employer within the same account, which pushes the annual limit considerably higher than most people expect.

When most people hear “401(k)”, they immediately imagine a workplace retirement account that takes money out of every paycheck. There are several types of 401(k) plans, each with its own rules for taxes and contributions. More often than not, an employer’s offer depends on how big the company is, who owns it, and how much complexity it’s willing to handle. Some go for something simple and straightforward. Others need something more involved. Either way, the goal is to help employees save for retirement, but the details can vary widely from one workplace to another.

Graphic by Kate Farley

The traditional 401(k)

Put simply, a traditional 401(k) means money is taken from a paycheck before taxes are withheld, thus lowering what’s owed in taxes that year. Then, money sits in an account and grows over time without being taxed year after year, meaning the account holder doesn’t need to worry about paying taxes on the dividends, interest, or gains it earns along the way. The tax bill comes later, when the account holder retires and starts withdrawing funds. At that point, it gets taxed like regular income.

The Roth 401(k)

For Roth 401(k)s, taxes are paid on the money before that sum is added to an account. Then the money grows without being taxed every year. So, when the account holder retires and starts taking it out, it’s all tax-free, both the original contributions plus all the earnings the account has built up over the years. For a Roth 401(k) to be tax-free, the account holder must be at least 59½ and the account must have been open for at least five years.

The core difference between traditional and Roth 401(k)s comes down to timing. Traditional means taxes are paid later. Roth means they’re paid now, and the account holder doesn’t have to worry about income tax in retirement. 

One thing worth knowing for 2026: if an account holder earned more than $150,000 in FICA wages the prior year, they’ll be required to make any catch-up contributions on a Roth basis (IRS Notice 2025-67).

The regular $24,500 base limit for workplace plans isn’t changing.  Something worth noting is that this does not apply to Traditional IRAs. The $24,500 base limit applies specifically to employer-sponsored plans such as a 401(k), 403(b), or 457(b). IRAs have much lower contribution limits, capping at $7,500.  Instead, this rule dictates that if an account holder is a high earner, their extra 401(k) catch-up contributions must now go into a Roth account rather than a traditional pre-tax one.

Go Further: FICA wages are the specific earnings a worker receives that are subject to the Federal Insurance Contributions Act payroll tax. This money is automatically withheld from an employee’s paycheck to fund the nation’s Social Security and Medicare programs. Most standard forms of compensation, including hourly pay, salaries, and bonuses, count toward your total FICA wages.

Safe Harbor 401(k)

A safe harbor 401(k) is pretty similar to a traditional plan, with one key difference: it skips the annual nondiscrimination testing entirely. This is a mandatory IRS compliance check for traditional 401(k) plans, designed to ensure the plan fairly benefits all workers rather than serving solely as a tax shelter for business owners and highly compensated executives. To pass, the average contribution rates of high earners cannot be significantly higher than those of the rank-and-file staff. 

If a plan fails because lower-paid employees aren’t participating enough, the company is forced to either make unexpected contributions to staff or issue taxable refunds to bosses, thereby capping their retirement savings. A Safe Harbor 401(k) bypasses this entire headache because the employer commits upfront to giving a baseline, mandatory contribution to its employees, which automatically satisfies the IRS’s fairness requirements and allows high earners to max out their personal savings without any annual testing restrictions.

With a Safe Harbor 401(k), the employer agrees up front to make certain contributions that automatically satisfy the IRS’s fairness requirements. The employer must contribute to the plan, either by matching employee contributions or by making a set contribution for all eligible employees. And employees own that money right from day one. There’s no waiting period, no gradual vesting; it’s theirs immediately. That’s the trade-off.

This design is particularly attractive for companies where high earners want to max out their contributions without the anxiety of failing a fairness test or having their money handed back, thereby giving everyone involved greater predictability.

Solo 401(k)

A solo 401(k) is for self-employed people and business owners who don’t have any full-time employees other than maybe a spouse. Simply put, it’s a way for people who work for themselves to save for retirement at a level that’s comparable to what employees at larger companies can do.

What makes this plan stand out is the contribution math. An account holder can contribute as both an employee and the employer, all in the same plan. As an employee, the 2026 limit is $24,500, but the employer can add profit-sharing contributions of up to 25 percent of the net self-employment income on top of that.  Both sides combined, and the total ceiling for 2026 is $72,000 (IRS Notice 2025-67). That’s significantly higher than what an account holder could get with a standard IRA or SEP-IRA in most income scenarios.

Go Further: The IRS has a dedicated page for one-participant 401(k) plans packed with useful details: eligibility, contribution calculations, and the Form 5500-EZ filing requirement for plans with more than $250,000 in assets. You can find it at irs.gov/retirement-plans/one-participant-401k-plans.

SIMPLE 401(k)

A SIMPLE 401(k) is designed for small businesses with 100 or fewer employees. It’s structured similarly to a SIMPLE IRA, and no nondiscrimination testing is required. That alone makes it much easier to manage for a small business with limited HR bandwidth.

Go Further: A SIMPLE IRA (Savings Incentive Match Plan for Employees) is an employer-sponsored retirement account designed for small businesses and self-employed individuals with 100 or fewer employees. It allows employees to make pre-tax salary contributions, while requiring the employer to make matching or fixed contributions.

For a small business that wants to offer a real retirement benefit without the compliance overhead of a full traditional 401(k), SIMPLE plans are a genuine middle ground. They’re not right for every situation, but for the right-sized company, they can significantly reduce the administrative burden.

How a financial advisor can help

A financial advisor can help an account holder choose the right plan type based on the size of their business, who owns it, how much administrative work the employer is willing to handle, and the actual goal. A qualified financial advisor or tax professional can likewise model the costs and benefits of each option and identify which structure actually fits the situation. That conversation is usually worth having before committing to a plan design, especially if the goal is to unlock advanced wealth-building loopholes like the “Mega Backdoor Roth.”

This strategy allows high earners to bypass standard IRA income limits and supercharge their tax-free growth. First, the account holder maximizes their pre-tax 401(k) contribution at $24,500. Next, they contribute an additional amount (up to the $72,000 IRS ceiling minus their employer match) into a separate “After-Tax” 401(k) bucket. Finally, they execute a carryover, immediately converting those after-tax dollars directly into a Roth IRA or Roth 401(k) so they grow entirely tax-free.

Because this maneuver is a complex compliance minefield, a financial advisor is essential. They will audit their client’s specific employer plan documents to ensure they legally allow after-tax contributions and in-service distributions, handle the tight timing of the conversion to avoid accidental taxes on earnings, and ensure business owners don’t inadvertently trigger IRS nondiscrimination testing failures by utilizing it.

FAQs

Can a worker contribute to both a Roth 401(k) and a traditional 401(k) in the same year? 

Yes, as long as the employer’s specific workplace plan offers both options. The $24,500 limit is the combined maximum allowed across an individual’s workplace 401(k) accounts. This gives any workers the flexibility to split their savings (for example, putting $12,000 into the traditional pre-tax side and $12,500 into the Roth side) as long as the total doesn’t exceed the overall 401(k) cap.  The workplace limit is completely separate from any personal IRA accounts you choose to open outside of your job. 

What happens to a solo 401(k) if the self-employed person hires a full-time employee? 

It can’t keep running as a one-participant plan anymore. That new employee needs to be added, and nondiscrimination testing applies unless the plan converts to a safe harbor design. The IRS lays out how to handle that transition on its one-participant 401(k) page. It’s one of those things that’s good to plan for before it happens rather than after.

Is a safe harbor 401(k) more expensive for employers than a traditional plan? 

Generally, yes, because employer contributions are required and vesting is immediate. But many employers find it worthwhile because it eliminates the risk of failing nondiscrimination tests, which can result in refunds to highly compensated employees and potential corrective contributions, neither of which is fun to deal with. For companies where owners earn significantly more than their staff, the safe harbor approach often makes planning much easier.

Glossary

  • ADP/ACP tests. Annual nondiscrimination tests for traditional 401(k) plans that compare contribution rates between highly compensated and non-highly compensated employees. Safe harbor and SIMPLE plans don’t have to deal with these.
  • Catch-up contribution. An extra amount workers aged 50 and older can put in on top of the regular limit. For 2026, that’s $8,000 for traditional and safe harbor 401(k) plans and $4,000 for SIMPLE plans, according to the IRS. A good way to accelerate savings in the years closer to retirement.
  • Elective deferral. The portion of an employee’s salary that goes into a 401(k) before taxes are withheld. The 2026 limit is $24,500 for traditional, Roth, and safe harbor plans and $17,000 for SIMPLE plans, according to IRS Notice 2025-67.
  • Nondiscrimination testing. The IRS requirement that 401(k) plans don’t disproportionately benefit highly compensated employees. Traditional plans have to pass annual ADP and ACP tests. Safe harbor and SIMPLE plans are exempt.
  • Safe harbor 401(k). A plan design that gets the employer out of annual nondiscrimination testing by requiring mandatory employer contributions that vest immediately.
  • SIMPLE 401(k). A simplified option for employers with 100 or fewer employees. Lower contribution limits than a traditional plan, but no nondiscrimination testing required.
  • Solo 401(k). A one-participant retirement plan for self-employed individuals and business owners with no full-time employees other than a spouse. Lets you contribute as both the employee and the employer in the same account, which means a much higher ceiling.
  • Super catch-up contribution. A higher catch-up limit for workers aged 60 to 63 under the SECURE 2.0 Act. For 2026, that’s $11,250 for traditional and safe harbor 401(k) plans and $5,250 for SIMPLE plans, according to the IRS.
  • Traditional 401(k). The most common employer-sponsored retirement plan. Contributions are pre-tax, the money grows tax-deferred, and withdrawals in retirement are taxed as ordinary income.

Sources

Disclaimer: Steady Retire and MediaFeed are providers of educational content and information. This article is intended for informational and illustrative purposes only and does not constitute financial, legal, tax, or investment advice. The information provided does not create a professional-client relationship and should not be used as a substitute for consultation with a qualified financial advisor, tax professional, or attorney. While we strive to provide accurate and up-to-date information, rules and regulations regarding retirement are subject to change. Always consult with a certified professional regarding your specific financial situation.