401(a) vs. 401(k)

Saving for retirement is vital in ensuring you have enough money to last you throughout retirement. Luckily, there are many retirement plans from which to choose. Some retirement plans are held in investing institutions, while others are provided by employers. Employer-sponsored retirement plans are the most utilized of them all. The most common types of defined-contribution retirement plans offered by employers are 401(k) plans and 401(a) plans.

The differences between 401(a) plans and 401(k) plans are the types of employers that offer them. 401(a) plans are typically provided by the government and nonprofit employers, while 401(k) plans are provided by public sector employers. While 401(k) plan participation is not mandatory for employees, participation in a 401(a) plan usually is mandatory. The amount employees choose to contribute to a 401(k) plan is up to them, and the employer determines contribution amounts for 401(a) plans.

Those who are unfamiliar with the various types of retirement accounts may get confused by the endless options. Searching through a seemingly endless menu of acronyms like IRA, Roth, and SEPP, and number-letter combinations like 401(k), 401(a), and 403(b) can leave many aspiring retirement savers lost. Let’s break down further the differences between two, the 401(a) and the 401(k).

What is a 401(a)?

401(a) plans are typically provided by government agencies, educational institutions, and nonprofit organizations. These plans are usually unique to each organization and can be offered to select employees as an added incentive to stay with the organization. The employer normally sets the employee contribution amount as a percentage of their salary. Contributions are made with pre-tax dollars. However, a 401(a) plan may allow participants to make additional voluntary contributions on an after-tax basis and is limited to 25% of their compensation.

The max maximum pre-tax contribution limit to a 401(a) plan is $19,500, with an additional $6,500 for those over 50. The total contribution limit to a 401(a) plan is $58,000 in 2021.

Additionally, the employer is required to contribute to the plan, as well establishes the vesting schedules of the 401(a). Employee participation is often mandatory. If employees leave, they can usually withdraw their vested money by rolling it over into a 401(k), IRA, or another 401(a); they can also purchase an annuity.

The investment choices available in a 401(a) are determined by the employer and tend to be more limited than 401(k) plans. Government-sponsored 401(a) plans, in particular, tend only to include the least risky, most conservative investment options.

What is a 401(k)?

401(k)s are a type of retirement account that private employers provide through their benefits package. Contribution and growth are tax-deferred until retirement. Employers have the option to contribute to a 401(k) through matching contributions and can establish a vesting schedule or immediately vest a 401(k). 

Because a 401(k) is a designated retirement account, withdrawing funds before retirement could trigger penalty taxes on the amount that was taken out.

The contribution limits for 401(k)s are the same as 401(a) plans. In 2021 participants can contribute up to $19,500, or $26,000 for over 50, and a maximum limit of $58,000.

How do 401(a) plans differ from 403(b) plans?

401(a) plans often get mistaken for 403(b) and visa versa as both are provided to government employees and those who work for non-profits. However, there are some distinct differences between the two plans.

Vesting occurs much quicker with 403(b) plans than with 401(a) plans, as many 403(b)s offering immediate vesting to their employees. 401(a) plans use vesting schedules as a means to persuade employees to stay at their jobs.

Additionally, 403(b) plans offer an additional catch-up bonus for employees even if they are under 50. Employees who have been with a company for 15 years can begin making catch-up bonuses of $3,000 per year. Catch-up bonuses towards 403(b)s are capped at a $15,000-lifetime amount. 401(a) plans follow the same catch-up bonus system that 401(k) plans use only for those over 50.

Lastly, 403(b) plans prominently feature annuities, while 401(a) plans offer low-risk investment options that typically include government bonds and mutual funds that focus on value-based stocks.