401(a) vs. 401(k) – Understanding the Difference
What Is 401(a)?
401(a) is a type of savings plan that is sponsored by an employer, typically offered by government agencies, educational institutions, and nonprofit organizations rather than by companies in the private sector.
This type of plan allows employees to save for retirement on a tax-deferred basis. Employers may also make contributions to employees’ 401(a) accounts.
What Is 401(k)?
A 401(k) is a retirement savings plan sponsored by an employer. It lets workers save and invest for their own retirement on a tax-deferred basis.
Employees can contribute pre-tax income to their 401(k) account, lowering their taxable income for the year. The money in the account grows tax-deferred, meaning employees won’t pay taxes on the investment growth until they retire and start withdrawing money from the account.
Most 401(k) plans offer a variety of investment options, including mutual funds, stocks, and bonds. Some plans also offer annuities as an investment option. Employees can typically choose how to allocate their 401(k) contributions among the available investment options.
401(a) vs. 401(k)
401(a) plans are similar to 401(k) plans, but there are some key differences.
For example, employee contributions to the 401(a) plan are determined by the employer, while 401(k) participants decide how much they want to contribute to their plan (if anything).
With a 401(a) your employer may structure your plan’s contributions either after-tax or pre-tax dollars.
The employer determines this structure with a 401(a), not the employees.
If pre-tax, this means contributions are taxed upon withdrawal, not at the time of investment.
If after-tax, contributions are taxed before being deposited into the investment account.
A 401(k) is a tax-deferred retirement plan, and usually, your contributions come directly out of your pre-tax paycheck. You pay income taxes on your withdrawals after your retire at your ordinary tax rate.
401(a) vs. 401(k)
What Happens to My 401(k) or 401(a) When I Quit?
You may be able to do any of the following:
- leave the funds in the account
- roll it over to an IRA, or
- cash it out
For those who cash out, there will be a 10% penalty on the withdrawal, in addition to any taxes on the funds based on your tax bracket.
Can You Take Money Out of a 401(k) or 401(a)?
Yes, in some circumstances you can take a loan from your 401(k) without penalty. The funds are still considered tax-deferred, meaning that you’ll owe taxes on the borrowed amount when you eventually withdraw it in retirement.
You may also be able to withdraw money from your 401(a) plan before retirement if you experience financial hardship, though this will typically result in a 10% early withdrawal penalty.
Any funds you take out of a 401(k) will be treated as income and you will owe taxes on it on both a federal and state level.
Summary – 401(a) vs. 401(k)
401(a) and 401(k) plans are both employer-sponsored retirement savings plans that offer employees tax benefits.
With a 401(a), your employer determines how much you contribute, while with a 401(k), you decide how much to contribute (if anything).