401a vs 401k: What Is The Difference?

Shawn Plummer

CEO, The Annuity Expert

Before, most workers used to rely on their monthly retirement contributions. But now, most employers do not have pension plans, and they often replace them with workplace retirement savings packages like the 401a and 401k.

Both the 401a and 401k are sponsored retirement savings plans, but they are for different types of employers.

What is a 401(a) retirement plan?

Government and Non-profit Organization Employers

401a is called a money-purchase retirement package. It is usually offered by NGOs, government establishments, and educational institutions. 401a is customized and offered to certain employees as an incentive for them to stay with the company.

Employers usually dictate how much money a person has to put into this plan every month. Usually, the employer contributes money in addition to the employee.

When an Employee Leaves

If the employee leaves, they can take their contributions and put savings into another qualified retirement plan.

Mandatory Participation

Most companies who offer 401a will make it mandatory for all employees to participate. But the employer can decide how much they want to put in. The employer decides if an employee can take part in this retirement plan.

The 401a can be pre-taxed or post-taxed

One of the main features of the 401a is that you can contribute funds before or after taxes are taken out.

In some cases, an employee can withdraw part of their retirement fund for an emergency. However, if they do so, they will have to pay taxes on the withdrawn money. There is also an early withdrawal penalty (10%) and income taxes if the withdrawal is taken before age 59 ½.

What is a 401(k) retirement plan?

Offered by private sector employers.

Private employers often offer 401k plans to their employees. In addition, employees can choose to contribute voluntarily.

Employers normally have a variety of options for contributing to this retirement plan.

The employer can give the employee a match if they can’t afford to pay for the whole thing.

401(k) contributions are funded with pre-taxed money

In the 401K, money is invested before taxes are paid.

You can change the amount you put in at any time. That’s not true for 401a. Best of all, 401k contributions come with some tax advantages.

An employee can put some of their paychecks into a 401k before taxes. Employees can decide how much they want to put in.

Related Reading: 401k vs. Roth 401k: Which is Better?

Only contributed by the employee

The 401k is different from the 401a. In 401a plans, the employer and employee make monthly contributions. But in the 401k, only employees make monthly contributions.

The employer doesn’t need to contribute to that plan.

The employer can offer different investments to the employee. For example, the employer might have up to 25 options.

Disadvantages

A 401k is a type of investment that can be hard to understand. You will pay taxes when you withdraw the money from the account in the future, when taxes may be higher than today.

401a vs. 401k Differences

  • 401(a) is offered by public employers and NGOs
  • 401(k) is offered by private employers
  • Participating in a 401k is voluntarily
  • Participating in a 401a is mandatory
  • 401(k) contributions amounts are dictated by the employee
  • 401(a) contributions amounts are dictated by the employer
  • 401k offer a wide range of investment options
  • 401a offers a limited range of investment options
  • Employee to be at least age 21 to participate in a 401(a) and 401(k)
  • Employees must have at least one year of service for 401k plans.
  • Employees must have at least two years of service for 401a plans.
  • $58,000 is the maximum annual contribution for 401(a) plans.
  • $19,500 is the maximum annual contribution for 401(k) plans.
  • 401(k) plans offer an “Age 50 Catch-Up“, 401(a) plans do not.

How to spend a 401(k) plan efficiently in retirement

Employees can’t touch their 401(k) plans without a tax penalty until they’ve reached the age of 59½ years. At that time, a 401(k) plan owner can roll over their retirement savings plans into a deferred IRA annuity with a lifetime income rider without tax consequences. The annuity will then equally distribute (now or in the future) a percentage of the retirement account for the rest of the retiree’s lifetime or married retirees’ lifetimes, even after the account has run out of money.

How to spend a 401(a) plan efficiently in retirement

Employees can’t touch their 401(a) plans without a tax penalty until they’ve reached the age of 59½ years. At that time, a 401(a) plan owner can roll over their retirement savings plans into a deferred IRA annuity with a lifetime income rider without tax consequences. The annuity will then equally distribute (now or in the future) a percentage of the retirement account for the rest of the retiree’s lifetime or married retirees’ lifetimes, even after the account has run out of money.

401A Vs. 401K: What Is The Difference?

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What Is A 401a Retirement Plan?

A 401(a) plan is a type of defined benefit retirement plan, typically sponsored by an employer. It is similar to a traditionally defined benefit pension plan, but it is funded by employee contributions rather than employer contributions. Contributions are made to the plan on a pre-tax basis and the funds in the plan grow tax-deferred until they are withdrawn at retirement. The employer typically selects the investment options for the plan, and the benefits are typically based on a formula that takes into account factors such as the employee’s salary and years of service.

What Is A 401a Account?

A 401(a) account is a type of retirement savings account that is established as part of a 401(a) plan. Contributions are made by the employee, and sometimes by the employer, to the account on a pre-tax basis. The funds in the account grow tax-deferred until they are withdrawn at retirement. The employer typically selects the investment options for the account and the benefits are typically based on a formula that takes into account factors such as the employee’s salary and years of service. The employee typically does not have control over how the money is invested and usually cannot access the money until retirement, death, or disability, but some plans may allow for loan provisions.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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