A traditional 401k is a retirement account you typically have through your employer and can make pretax contributions every paycheck. Many people use this to save on their total tax burden for the fiscal year because your total income can be reduced overall when you file—so you pay less taxes at the end of the year. Secondly, it’s a double tax haven. Your initial contributions out of your paycheck are pretax—they are not subject to income tax. At the end of the year when you go to file taxes, your total amount of contributions for the year can be deducted from your annual income so you are taxed less at the end of the year so you don’t pay taxes on those contributions AND they save you in income taxes when you file annually.

Another reason it’s a great account are often part of an employer match program. Employers often offer a 1% match so it’s free money invested and you make interest off that over time until retirement. Some employers have additional match bonuses at 3%. I’ve had former employers offer 3% match standard but had a doubling period so we’d get a 6% contribution match for the year if we enrolled and upped our automatic contribution rate for every paycheck. That’s an incredible investment on your future! It makes it a lot easier to hit the max contribution limits of $23,500 for 2025 and not all of that coming from your salary but your actual employer. They’re matching what you put in up to that percentage, whatever your plan rate is. Ask your HR department. If you’re 50 years or older, total max contributions for the year are $31,000. Contributions for the year CANNOT exceed your stated taxable income on your tax returns so make sure your contributions aren’t going over and not going to be more than your tax forms will state you are making.

Smaller businesses and other companies may offer what’s called a Safe Harbor 401k or Simple 401k. They are similar but have some differences so be sure to read your plan and consult your CPA/HR department for answers and terms like vesting employees for a minimum of two years, etc. Most employers do not use these but smaller companies might. The other main type is a Roth 401k which I cover separately on the next blog post because there are a few key differences you should consider.

If you’re planning to not live off a high income (remain in a lower tax bracket in retirement) then a traditional 401k might be better since you’re taxed on the withdrawal amounts in your later years. If you’re hoping to keep up with a higher income bracket due to expenses, travel, etc in your retirement age, then a Roth 401k might be best since you’re taxed now at your current adjusted income instead of later when you might be living off much more—you wouldn’t get taxed in retirement that way.

You can easily open accounts with any investment firm like Charles Schwab or Fidelity; or you can use your HYSA banks like SoFi to set up if you don’t have an employer sponsored 401k. These companies also offer rollover 401ks if you’re leaving the company you work at and want to keep your investments intact. Talk to a financial planner with one of them to get setup. It’s fast and easy!