A 401(k) plan is a retirement savings plan offered by many US employers that has tax advantages for the saver. It is named after a section of the IRC §401(k), “Qualified pension, profit-sharing, and stock bonus plans”.
The employee who signs up for a 401(k) agrees to have a percentage of each paycheck, up to the limit in Table 8.3, paid directly into an investment account. The employer may match part or all of that contribution. The employee gets to choose among a number of investment options, usually mutual funds.
The main difference between a 401(k), a 403(b) and a 457(b) is who offers these plans. Private employers offer 401(k)s, whereas 403(b)s and 457(b)s are generally offered by public sector employers:
Private employers, such as for-profit businesses, generally offer 401(k)s.
Public sector employers, such as schools, churches, and nonprofits, generally offer 403(b)s.
Public sector employers, such as government and municipal employees, generally offer 457(b)s. Tax-exempt organizations may also offer 457(b)s to a select group of highly compensated or management employees.
The contribution limits for 403(b) plans are now identical to those of 401(k) plans. You can contribute to both a 403(b) and a 457(b) in the same year, and—because the 457(b) carries its own separate limit—the two do not share the 402(g) elective-deferral cap. If you need more room to put aside money for retirement, a 457(b) plan may be best for you. A 403(b) often offers a larger array of investment options. However, you can also split your contributions between both plans. In 2026, you can save $49,000 between the two plans, not including any catch-up contributions if you’re eligible.
A 401(k) comprises three buckets: pre-tax, Roth, and after-tax (see Table 8.4). To appreciate the scale of this tax shelter, compare it to a taxable account, where your returns are chopped in half by ordinary income rates or capital gains taxes on realizations.
Max out your 401(k) contribution to take advantage of employer’s match.
There is never any way to have your Federal and State income tax be zero, even if you elect 100% of your bonus to pre-tax 401k. The reason is that 401K does not reduce taxable wages for Social Security, Medicare and SDI. Those taxes still need to be withheld on your bonus, and if we put the full bonus amount into the 401k deduction, there would be no earnings left to cover those withholdings. Since we cannot issue a negative payment, some part of the bonus needs to be set aside (i.e. not included in the 401k deduction) to cover those 3 taxes. When we do that, the portion that is not going into 401k is also taxable for State and Federal income tax.
See section “Lazy Portfolio for 401k” for possible assets allocation in 401k.
Some 401(k) plans allow self-directed brokerage accounts. The Self-Directed Brokerage Account associated with your 401(k) is allowing you to purchase various investment products not available in your core mutual fund lineup. Plan administrators may charge a fee for this service, and may also set restrictions on the types of investments you can make and fraction of your 401(k) you can invest in the brokerage account. Note, IRA accounts are “self-directed” by default.
To get started, you’ll need to first apply for a Self-Directed Brokerage Account. After submitting your application, you will be able to begin transferring funds into your Self-Directed Brokerage Account within 1–2 business days.
If available, this option allows you to invest in individual stocks, bonds, ETFss, cryptocurrency and wider range of mutual funds. You can also use advanced investment strategies such as options and futures. The investment custodian (Schwab, Fidelity, Vanguard, etc.) where you establish your account will often have its own rules. In some situations, these rules and more restrictive than IRS rules.
A Solo 401(k) plan (also known as an Individual 401(k) or Self-Employed 401(k)) is an exceptional retirement savings plan designed for self-employed individuals and small business owners with no employees other than a spouse. It shares the same contributions limits and rules as a regular 401(k) but offers a dual-capacity advantage that business owners can leverage.
You can open a Solo 401(k) with any major financial institution or brokerage. To adopt the plan, you must establish an Adoption Agreement and secure an employer identification number (EIN) from the IRS.
The true power of the Solo 401(k) is that you can make contributions as both the employee and the employer:
Up to 100% of your net self-employment income, capped at the standard elective deferral limit ($24,500 in 2026, or $32,500 if age 50+).
Up to 25% of your net self-employment earnings (adjusted by subtracting 50% of your self-employment tax deduction).
The combined employee and employer contributions cannot exceed the Section 415(c) limit ($72,000 in 2026). Keep detailed records of your contributions and refer to IRS Pub. 560, “Retirement Plans for Small Business” for the exact calculations.