3 Types of 401K Design

Something that many people are surprised to learn is that there are a few different types of 401k plans that they may be able to use to their advantage. To create a 401k plan design, consider reviewing the following three options:

The Traditional 401k

This is probably the one plan design that a lot of people are familiar with. It can be used within any private or public company and it tends to have a lot of flexibility to it. Many employers will have a contribution amount set in place, which could be a 100 percent match to what the employee contributes or it could have a limit up to a certain dollar amount. Also, this amount can be changed every year without complications. The traditional 401k also allows employees to contribute pre-taxed money.

The Roth 401k

The Roth 401k is fairly standard and similar to the traditional one. However, the main difference is that the money that is contributed is taken post-taxes. This means that the money is taxed as normal and then it is moved over into the 401k. Any money that is made on the dividends or capital gains will not be taxed. It usually does not take a lot of money to start this type of plan within your company.

The Solo 401k 

Also called the self-employed 401k, the Solo 401k allows sole proprietors, LLCs, and independent contractors to contribute to a 401k. They are allowed to contribute as both the "employer" and as the "employee." When contributing as the employer, all of the contributions made will be tax-deductible. Also, all growth from the contributions is tax-deferred. This is not for you if you have employees on the books, but you can have your business partner or spouse contribute as well.

When it comes to setting up your 401k, you will want to make sure that you are getting the best plan design for your personal needs. You can ask your employer to set you up with someone within the company that can help guide you through the process. If you are self-employed, then you might want to seek out help from a skilled financial planner. The sooner you begin to contribute to a 401k, the quicker you will see it begin to grow. You will then be able to diversify and build up your retirement funds. Reach out to 401k design services to learn more.