401(A) Vs. 401(K): What Are The Key Differences?

Unless you're already in retirement, saving for a 401 (k) can seem like an impossible mountain to climb. That said, the importance of having adequate savings for your later years cannot be overstated. The type of savings plan you choose will impact how much money you have when you retire, as well as how much income tax you pay on that income. You probably know that there are two main retirement savings accounts: 401(k)s and Roth IRAs. You might not know the differences between 401(a) and 401(k). Both types of accounts have their pros and cons, so it's essential to understand which one is the best fit for you. 

And while the name makes it seem like these two retirement savings plans couldn't be more different, they share quite a few similarities. As such, it's essential to understand the differences between 401(k) and 401(a) plans and which might be best for you. Keep reading to learn more about each plan and see if one could be better for you than the other. Here's an overview of everything you need to know about the differences between 401(k) vs. 401(a).

What Is A 401(k) Plan?

A 401(k) is a type of tax-advantaged retirement account offered by employers. The name comes from its section in the IRS code, section 401(k). These plans allow workers to set aside a portion of their pretax income to grow tax-free until the time to withdraw it in retirement. In other words, contributions to your 401(k) will come out of your paycheck before taxes are taken out, so you don't have to pay taxes on the amount you contributed. 

That's because you can defer taxes on your contributions and any returns they make until you withdraw the money in retirement. 401(k) plans are offered by a vast majority of companies, making them the go-to solution for most people looking to save for retirement. 

What sets 401(k) plans apart from other retirement savings vehicles is that they're primarily self-directed. It means you can control which investments you choose inside the plan. You can use different investment options like stocks, bonds, mutual funds, and ETFs.

The main advantage of a 401(k) plan is that it allows you to save a significant amount in taxes by putting money into this plan. You'll also be able to take advantage of the employer's matching contribution, which is a nice perk. 

While many employers offer 401(k) plans, you may also be able to open an individual 401(k) plan outside of your place of employment. In this case, you would be responsible for setting up the plan and contributing the funds.

What Is A 401(a) Plan?

The second type of 401 accounts is 401(a). A 401(a) plan is another type of direct contribution retirement plan which employers can offer their employees as a substitute for a 401(k) plan. 

The only real difference between a 401(a) and a 401(k) plan is the fact that a 401(k) plan is for employees while a 401(a) plan is for non-profit employees and government workers. 

Another main difference is that you have fewer investment options. Unlike 401(k) plans, contributions to a 401(a) plan would not be withheld from your paycheck. Instead, you would make a pretax contribution to the plan through payroll deductions, the same as you do with a 401(k) account. 

When setting up a 401(k) account, there are many options to choose from. You can choose different stocks, bonds, mutual funds, and ETFs. A 401(a) might only have a few mutual funds. 

In addition to this tax advantage, the same advantage of a 401(k) plan, saving for retirement in a 401(a) plan can be beneficial in the long term. That's because you can defer taxes on your contributions and any returns they make until you withdraw the money in retirement.

What's The Difference Between A 401(a) vs. 401(k)?

While the two types of plans have a few key differences, 401(k) vs. 401(a) plans are both types of DC plans that allow you to save for retirement on a pretax basis. However, unlike 401(k) plans, 401(a) plans do not require employees to contribute a certain percentage of their salary. Instead, employees are allowed to contribute a portion of their income. 401(k) plans also impose higher contribution limits than 401(a) plans. The contribution limit for 401(k) plans is currently $19,000, while the contribution limit for 401(a) plans is $16,500. 

In addition to these differences, there is one significant difference in how the plans are funded. 401(k) plans are funded by the contributions made by their participants, their investments, and, in some cases, a combination of both. On the other hand, 401(a) plans are funded entirely by the contributions made by the employer. 

The investment options for each plan are also different. With a 401(k) plan, you have many options when picking the investments in the plan. You'll have fewer investment options with a 401(a) plan.

How To Choose Between A 401(a) vs. 401(k)?

One way to pick between the two is to look at how much control you have over picking the investments in the plan and how much you can save in taxes. If you want full control over choosing the investments and want to save as much in taxes as possible, then a 401(k) plan is the way to go. However, if you want to save money, but don't care as much about picking the investments, then a 401(a) plan might be better. 

You should also consider how much time you have left to save. If you have a long time until retirement, you should focus on investing. But if you have a shorter time frame until you plan on retiring, you should focus on saving as much as possible while minimizing taxes.

Conclusion

We've looked at the major differences between 401(k) plans and 401(a) plans. While they're both very similar, a few key differences also set them apart. A 401(k) is offered by employers and allows for more control when choosing the investments in the plan. You also save more in taxes by putting money into a 401(k) plan. A 401(a) is offered by government organizations or non-profit organizations and often has fewer investment options. Other differences include that a 401(k) allows for more control and a 401(a) allows for more tax savings. 

401(k) plans are the better option for contributing to a tax-advantaged retirement plan. That said, while many employers offer 401(k) plans, you may also be able to open an individual 401(k) plan outside of your place of employment. Whether you choose a 401(a) vs. 401(k), contributing to a DC plan is vital to have adequate savings for your later years.