401(a) vs. 401(k): How they differ

401(k) and 401(a) plans are both employer-sponsored retirement savings accounts that offer tax benefits. But you may be eligible for only one. We’ll explain how each works so you can make the most of your retirement savings.

401(a) vs. 401(k): What’s the difference?

401(k) plans are offered by private-sector employers, while 401(a) plans are reserved for government and nonprofit employees. With a 401(k) plan, an employee chooses if and how much to contribute. But with a 401(a) plan, your employer decides how much and whether contributions are mandatory or optional.

401(k) contributions are made with pre-tax dollars. This means you can make tax-deductible contributions, but you’d owe income taxes on qualified withdrawals in retirement.

An employer can decide whether 401(a) contributions are pre-tax or post-tax. You pay taxes on the latter, but qualified withdrawals would be tax-free.

How does a 401(a) plan work?

A 401(a) plan is one typically offered by government organizations, educational institutions and nonprofits. When you enroll in a 401(a) plan or are mandated to, you have a menu of different investment options to choose from. These typically consist of conservative investment options like government bonds and mutual funds mixed with high-value stocks. But some may contain aggressive bond and stock funds.

Your investments grow tax-free while in the account. But you’ll owe taxes on the withdrawals if you fund it with pre-tax dollars.

Employers are required to participate in the plan. They also decide vesting schedules. This determines how long you have to stay with the company in order to leave with all company matching contributions made to your account.

You can start withdrawing money penalty-free once you reach age 59.5, but you may owe a 10% early withdrawal penalty if you do so before. Keep in mind that income tax will apply to all withdrawals regardless of what age you made these if you funded your 401(a) on a pre-tax basis. In this case, digging in early means Uncle Sam takes a bigger chunk.

How does a 401(k) plan work?

A 401(k) plan is offered by many private-sector employers. If you’re eligible to enroll in one or are automatically enrolled, you can build a savings portfolio with a menu of different investments. These can include stocks, bonds, funds and annuities.

A traditional 401(k) is funded with pre-tax dollars. So you can deduct contributions from your taxable income up to applicable limits. However, your employer also may offer a Roth 401(k) option. These function similarly to traditional 401(k)s but are funded with after-tax dollars, so qualified withdrawals are tax-free in retirement.

You can begin taking penalty-free withdrawals once you reach age 59.5. But you’ll trigger a 10% early withdrawal penalty and income taxes on withdrawals made prior to that.

Contribution limits

Every year, the IRS sets contribution limits for qualified retirement plans such as 401(k)s and 401(a)s.

For 2021, the 401(k) employee contribution limit is the lesser of total compensation or $19,500 ($26,000 if you’re 50 or older). The contribution limit, including employer matches, is $58,000 ($64,500 if you’re 50 or older.) However, you can only deduct the first $19,500 from your taxable income.

For 2021, the 401(a) contribution limit is $58,000. This includes employee and employer contributions. However, your employee contribution is still limited to total compensation.

401(a)s and 401(k)s compared

You may be choosing between a job that offers a 401(k) plan and one that offers a 401(a) plan. So it’s important to know about their differences and similarities.

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Am I eligible for a 401(a) plan?

You may qualify to enroll in a 401(a) plan if you work for the government, education and nonprofit sectors. Ask your employer about contribution rules, vesting schedules and investing options.

Bottom line

401(a) plans are generally offered by the government and nonprofit sectors, while 401(k) plans are offered by the private sector. Both are retirement investing vehicles that offer tax breaks. But administrative fees and other expenses can lower your returns.

Understand how both work before you decide to enroll. You can also compare brokerage firms that offer a variety of individual retirement accounts (IRA) and Roth IRA options. Anyone can open these types of accounts.

Frequently asked questions

• If I enroll in a 401(a) plan, can I enroll in another plan?

  Your employer may allow you to enroll in another plan you may be eligible for such as a 403(b) plan. You can also open an IRA or Roth IRA outside of your employer if you’re eligible.

• Can I roll over my 401(a) into a 401(k)?

  Yes. After you leave your job that provides the 401(a), you can take steps to roll it over to a 401(k) with a new employer.

• Am I eligible to enroll in my employer's 401(k) plan?

  Under the SECURE Act passed in 2020, you must be allowed to participate in your company’s 401(k) plan if you’ve worked at least 500 hours in three consecutive years and are at least 21 years old.