Exploring 401(k)s
A 401(k) plan is an employer-sponsored retirement savings plan that has tax advantages for the saver. The saver can contribute income, and employers may match contributions. Below are three types of 401(k)s, which differ primarily by how they are taxed.
- Employee contributions to a traditional 401(k) are pre-tax, meaning they are deducted from taxable income, and taxes are applied at the time of withdrawal.
- Contributions to Roth 401(k)s are made with after-tax income, so no tax is applied at the time of contribution, or at withdrawal.
|
Feature |
Traditional 401(k) |
Roth 401(k) |
Solo 401(k) |
|
Eligibility |
Offered by employer |
Offered by employer |
Self-employed individual/spouses with no employees |
|
Annual Contribution Limits (as of 2023) |
$20,500 ($27,000 if 50 yrs or older) |
$20,500 ($27,000 if 50 yrs or older) |
Can contribute as both employer and employee, for a higher limit of $61,000 ($67,500 if 50 yrs or older) |
|
Tax Treatment (Contributions) |
Pre-tax |
After-tax |
Pre-tax or After-tax (Roth) |
|
Tax Treatment (Withdrawals) |
Taxable as income |
Tax-free |
Taxable as income (Traditional) / Tax-free (Roth) |
|
Withdrawal Rules |
Penalty if before 59½ (with exceptions) |
Tax-free and penalty-free after 59½ (if account is 5 years old) |
Penalty if before 59½ (with exceptions) |
|
Employer Match |
Often % matched by employer |
Often % matched by employer |
Not applicable |
The information provided here is not intended as tax or legal advice and should not be taken as such; consult a qualified attorney or certified public accountant for professional guidance.