A 401(k) plan and a 401(a) plan may sound confusingly similar, but there are some differences between the two retirement accounts.
The biggest differences between 401(k) and 401(a) plans are in the types of companies that offer them and their contribution requirements. While most private sector companies are eligible to offer 401(k) plans, only certain government and public organizations can offer their employees a 401(a) plan. Employers must contribute to 401(a) plans and can make it mandatory for employees to contribute a pre-set amount as well. By contrast, employers do not have to contribute to 401(k) plans and employees are free to choose whether they want to contribute.
What Is a 401(a) Plan?
A 401(a) plan is an employer-sponsored retirement account that typically covers government workers and employees from specific education institutions and nonprofits. It is different from an IRA in that the employer sponsors the plan, determines the investment options that the employees can choose from, and sets the vesting schedule (the amount of time an employee will have had to have worked with the organization before all employer contributions become fully theirs, even if they leave the company).
With IRAs, the individual investor decides how much to contribute and if/when they want to make withdrawals from the account. With a 401(a) plan, employer contributions are mandatory; employee contributions are not. All contributions made to the plan accrue on a tax-deferred basis.
However, withdrawing from either type of plan may incur penalties for withdrawing money before age 59½.
What is a 401(k) Plan?
A 401(k) plan is a benefit offered by for-profit employers as part of the employee’s compensation package. The employer establishes the plan, along with the investment options the employee can choose from and the vesting schedule. As with 401(a) plans, funds contributed are tax-deferred and help employees save for retirement.
Some employers choose to offer a match program in which the company matches employee contributions up to a specific limit.
401(k) plans are also accessible to entrepreneurs and self-employed business owners.
Who Contributes to Each Plan?
Under a 401(a) plan, employer contributions are mandatory, though the employer can decide whether they’ll contribute a percentage of the employees’ income or a specific dollar amount. Employers can establish multiple 401(a) accounts for their employees with different eligibility requirements, vesting schedules, and contribution amounts.
Employee participation is voluntary, with contributions capped at 25% of their pre-tax income.
Under a 401(k) plan, employees can voluntarily choose to contribute a percentage of their pre-tax salary. Employees are not required to participate in a 401(k) plan. Employers are permitted but not required to contribute to a 401(k) plan, and many will match up to a certain amount.—say, 3%—of employees’s alaries.
401(a) vs. 401(k) Contribution Limits
For 2021, the total 401(a) contribution limit—from both employer and employee—is $58,000. However, employees with 401(a) plans can also contribute to a 403(b) plan and a 457 plan simultaneously (more on those plans in the 401(a) vs Other Retirement Plan Options section).
Employee contributions for 401(k) plans have a $19,500 limit in 2021. Employees who are 50 or older may contribute up to an additional $6,500 for a total of $26,000. An employee with a 401(k) plan can also have a Roth or traditional IRA. However, there are limits on how much they can contribute to an IRA account—$6000 for a traditional IRA, with an extra $1000 for people over age 50. If you are interested in open an individual retirement account then consider doing so through SoFi. You will get access to a broad range of investment options, member services, and our robust suite of planning and investment tools.
401(a) vs. 401(k) Investment Options
401(a) plans often offer various investment options, which may include more conservative investments such as stable value funds to more aggressive investments such as stock funds. Some 401(a) plans may allow employees to simplify diversified portfolios or seek investment advice through the plan’s advisor.
Most 401(k) plans also offer various investment choices ranging from low-risk investments like annuities and municipal bonds to equity funds that invest in stocks and reap higher returns.
401(a) vs. 401(k) Tax Rules
The tax rules in a 401(a) plan can differ from a traditional 401(k).
With a 401(a), employees make pre-tax or after-tax contributions, depending on how their employer decides to structure the plan. Pre-tax means contributions are not taxed at the time of investment, but later upon withdrawal. After-tax means contributions are taxed before being deposited into the account
A 401(k), on the other hand, is a tax-deferred retirement plan, meaning all contributions are pre-tax. The wages employees choose to contribute to their plan are untaxed upon initial investment. Income taxes only kick in when the employee decides to withdraw funds from their account.
Can You Borrow from Each Plan?
You can borrow from either a 401(a) or a 401(k) plan if you have an immediate financial need, but there are some restrictions and it is possible to incur early withdrawal penalties.
An employer can limit the amount borrowed from a 401(a) plan—and may choose not to allow employees to borrow funds. If the employer does allow loans, the maximum amount an employee can borrow is the lesser of:
• $10,000 or half of the vested account balance, whichever is greater OR
Because the employee is borrowing money from their account, when the employee pays back the loan’s interest, they are paying it to themselves. However, the IRS requires employees to pay back the entire loan within five years . If they don’t pay the loan back, the IRS will consider the loan balance to be a withdrawal and will require taxation on the remaining loan amount as well as a 10% penalty if the employee is under age 59½.
Borrowing from a 401(k) plan is similar. Employees are limited to borrowing $50,000 or half of the vested balance—whichever is less. One big difference between borrowing from a 401(a) plan vs. a 401(k) plan is employees lose out on a tax break if they borrow from their 401(k) because they are repaying it with after-tax dollars. Because the money is taxed again when withdrawn during retirement, an investor is essentially being taxed twice on that money.
Can You Borrow Money from a 401(a) or 401(k) to Buy a Home?
You may be able to use the funds from a 401(a) or 401(k) account to purchase a home. Remember, with 401(a) plans, the employer ultimately decides if loans are permitted from the account.
If you borrow money from your 401(a) or 401(k) to fund the purchase of a home, you have at least five years to repay what you’ve taken out.
The maximum amount you’re allowed to borrow follows the rules stated above:
• $50,000 OR
• The greater between $10,000 or half of what’s vested in your account,
Whichever is less.
When Can You Withdraw From Your Retirement Plan?
Employees can begin to withdraw money from their 401(a) plan without penalty when they turn 59½. If they make any withdrawals before 59½, they will need to pay a 10% early withdrawal penalty. Once they reach 70½, they’re required to make withdrawals if they haven’t already started to.
With a 401(k) plan, if an employee retires at age 55, they can start withdrawing money without penalty. However, to take advantage of this early-access provision, they need to have kept the money in the 401(k) plan and not have rolled it into a Roth IRA account.
Employees also need to have ended their employment no earlier than the year in which they turn 55.
Otherwise, the restrictions are the same as with a 401(a) plan, and they can begin to withdraw money penalty-free once they turn 59½.
401(a) vs. 401(k) Rollover Rules
Generally, 401(a) and 401(k) accounts have similar rollover rules. When an employee chooses to leave their job, they have the option to roll over funds. The employee can choose to roll the account into another retirement plan or take a lump-sum distribution. Generally, if the employee decides to roll over their plan to another plan, they have to do so within 60 days of moving the funds.
The rules for a 401(a) rollover dictate that funds can be transferred to another qualified plan like a 401(k) or an individual retirement account (IRA). The rules for 401(k)s are the same.
If the employee decides to take a lump-sum distribution from the account, they will have to pay income taxes on the full amount. If they are under 59 ½, they will also have to pay the 10% penalty.
What is a 401a Profit Sharing Plan?
A 401(a) profit sharing plan is a tax-advantaged account used to save for retirement. Employees and employers contribute to the account based on a set formula determined by the employer. Unlike 401(a) plans, the employer’s contributions are discretionary, and they may not contribute to the plan every year.
All contributions from employees are fully vested. The ownership of the employer contributions may vary depending on the vesting schedule they create.
Like 401(a) plans, 401(a) profit sharing plans allow employees to select their investments and roll over the account to a new plan if the employee leaves the company. If an employee wants to take a distribution before reaching age 59 ½, they are subject to income taxation and a 10% penalty.
401(a) vs Other Retirement Plan Options
401a vs. 403b
A 403b is a tax-advantaged retirement plan offered by specific schools and nonprofits. Like 401(a) and 401(k) plans, employees can contribute with pre-tax dollars. Employers can choose to match contributions up to a certain amount. Unlike the 401(a) plan, employers don’t have mandatory contributions.
As of 2020, the employee contributions limit is $19,500. If the plan allows, 50 or older employees may contribute a catch-up amount of $6,500.
Generally, 403b plans are either invested in annuities through an insurance company, a custodian account invested in mutual funds, or a retirement income account for church employees.
Additionally, 403b plans allow for rollovers and distributions without a 10% penalty after age 59 ½. Like similar plans, employees may have to pay a 10% penalty if they take a distribution before reaching age 59 ½ unless the distribution meets other qualifying criteria.
401(a) vs 457
457 plans are retirement plans offered by certain employers such as public education institutions, colleges, universities, and some nonprofit organizations. 457 plans share similar features with 401(a) plans, including pre-tax contributions, tax-deferred investment growth, and a choice of investments that employees can select.
Employees can also roll over funds to a new plan or take a lump-sum distribution if they leave their job. However, unlike a 401(a) or 401(k) plan, the withdrawal is not subject to a 10% IRS penalty.
Another option offered through 457 plans is for employees to contribute to their account on either a pre-tax or post-tax basis.
401(a) vs Pension
A 401(a) is a defined contribution plan, where a pension is a defined benefit plan. With a pension, employees receive the benefit of a fixed monthly income in retirement; their employer pays them a fixed amount each month for the rest of their life. The monthly payment can be based on factors like salary and years of employment.
With a 401(a), employees have access to what they and their employer contributed to their 401(a) account. In contrast to a pension plan, retirees aren’t guaranteed a fixed amount and their contributions may not last through the end of their life.
The largest difference between 401(a) and 401(k) plans is the type of employers offering the plans. Whereas 401(a) plans typically cover government workers and employees from specific education institutions and nonprofits, 401(k) plans are offered by for-profit organizations. Thus, a typical employee won’t get to choose which plan to invest in—the decision will be made based on what organization they work for.
Both 401(a) plans and 401(k) plans do have restrictions that might bother some investors. For example, an employee will be at the mercy of their employer’s choice when it comes to investing options.
Ultimately, saving for retirement may encompass more than just an employer-sponsored account. SoFi Invest® offers flexible retirement savings options to help members get closer to their retirement goals.
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