401(k) Plans

Why save with a 401k plan instead of an Individual Retirement Account (IRA)?

401(k) plans and IRAs are both great ways to save for your retirement and lower your taxes. There are two big differences between a 401(k) and IRA – with an IRA, you have to set it up yourself, and the amount that you can save pre-tax is a third of what you can save in a 401(k). 401(k) plans are established by an employer, including an owner-only/sole proprietor business. They also allow employers to contribute to their employees’ retirement savings, up to 25% of the employee’s compensation.

401(k) plans have higher contribution limits for you (and your employees, if you have them). Contribute up to $19,000 for 2019, plus up to $6,000 in “catch up” contributions if you’re 50 or older. With an IRA, the 2019 maximum contribution is $6,000, plus $1,000 in catch-up contributions if you’re 50 or older.

You don’t actually have to choose between a 401(k) and an IRA to save for your retirement—you can contribute to both – but there are rules to do so.

What are the types of 401(k) plans? 

If you’re trying to learn about 401(k) plans, you may feel overwhelmed by all the information and terms out there. Rest easy, it’s a lot less complicated than it seems. Here are the different 401(k) plan types you might have heard about:

Small business 401(k)

A small business 401(k) plan is basically the same as a large business 401(k): a plan that lets you take money from your pay (before paying taxes on it) to save for your retirement. No matter the size of the business, a 401(k) plan has the same benefits and the same maximum contributions. The difference is that 401(k) plans for big businesses get complicated—and expensive.

Big business 401(k) plans are designed for businesses with hundreds or thousands of employees. Because they are more complex, they often require in-person enrollment meetings and special human resources training. Most 401(k) plans for large businesses also have high fees—including “assets under management,” or AUM fees, which charge based on a percentage of the money in your account. That means that the more you save, the higher the fees.

The 401(k) plans we recommend detailed below are all “small business 401(k) plans.” They’re designed for small businesses and individuals who don’t have lots of time and budget to devote to managing a retirement plan. We eliminate all the jargon and offer straightforward, transparent pricing—so you can jump in and start saving in minutes while contributing more towards your bottom line.

Individual 401(k), solo 401(k), and self-employed 401(k)

It may sound like an individual 401(k), a solo 401(k), and a self-employed 401(k) are different types of plans, but in reality, all three terms are describing the same thing. An individual, solo, or self-employed 401(k) is a 401(k)-plan designed for self-employed people and sole-proprietor businesses. They offer the same savings flexibility and tax advantages of any other 401(k) plan, but in a way that is easy for individuals to manage themselves.

Self-directed 401(k)

A self-directed 401(k) plan is similar to a traditional 401(k), in that they allow for pre-tax savings and automated paycheck deductions. Where self-directed 401(k) plans differ from some types of traditional 401(k) plans is that employees can choose themselves where to invest their funds. (In some traditional 401(k) plans, the employer chooses the investment options for employees.

Simple 401(k)

A Simple 401(k) plan is, in many ways, a hybrid between traditional 401(k) plans and IRAs. Like with IRAs, employers offering Simple 401(k) plans don’t have to worry about testing their plan for compliance with certain regulatory requirements. Also, like IRAs and traditional 401(k) plans, both employers and employees can take loans against their retirement savings, and pay back funds and interest to their own accounts. Simple 401(k) plans do, however, have some disadvantages.

You don’t have the flexibility to customize a Simple 401(k) plan for the unique needs of yourself or your business the way you do with a 401(k). If you have employees in the plan, any contributions that you (the employer) make to your employees’ plans are immediately “vested.” That means your employees own those funds (and can take them with them to a new job) the moment they are contributed. With a 401(k), employers can set vesting schedules, so that employer contributions are only fully vested after the employee stays with the company for a certain amount of time.

Finally, Simple 401(k) plans have lower contribution limits than traditional 401(k) plans. For 2019, the maximum contribution to a Simple 401(k) plan is $13,000, plus an additional catch-up contribution of $3,000 for people 50 or older. Under 401(k) plans, individuals can contribute up to $19,000 for 2019, plus up to $6,000 in “catch up” contributions if they’re 50 or older.

Additional resources for 401(k) plans

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