401(k) Plan vs 401(a) Plan

401(k)

401(k) is a qualified employer-provided retirement plan that is designed to allow you the opportunity to invest money for your future. Although 401(k) accounts are not taxed until they are withdrawn at retirement, there are several important factors to consider before investing in one.

First, it can be expensive to have a 401(k). Some employers will charge up to 100 dollars just to sign up for the plan. Other employers will offer to match your 401(k) contributions, but this is not always a good idea. 

Second, you are limited in how much you can contribute annually. For many years the maximum 401(k) contribution was 100 percent of your income or $16,500, whichever was lower. For more recent tax years, the maximum contribution is $18,000.

401(a)

401(a) is a 401(k) alternative that is available to non-profit employees. The primary difference between a 401(k) and a 401(a) plan is that the 401(a) plan does not allow for employer matching contributions.

This means it can be much cheaper than a 401(k) because you are only responsible for paying the investment fees associated with your account. Also, there are fewer eligibility requirements for 401(a) plans.

Since 401(a)’s are so similar to 401(k)’s, many financial experts recommend a 401(a) plan as a supplement to a 401(k). If you have a 401(k), it is important to contribute enough money each payday so that you receive the maximum employer matching contribution from your employer. Many employers will offer to match your 401(k) contributions up to 6 percent of your income.

Although 401(a) plans do not allow for employer matching, they are very flexible when it comes to saving money. This is because you can contribute any amount of money on a pre-tax basis, regardless of how much you make. 

For example, if you earn $30,000 per year, you are 100 percent taxed. However, if you contribute 10 percent of your income to a 401(a) plan each pay period, only $27,000 will be subject to federal tax. This means that up to $3,000 can go into your 401(a) before being taxed!

However, 401(a)’s have several downsides. First, you are responsible for paying all of the investment fees associated with your account. This is often more expensive than a 401(k) because 401(a) usually requires you to invest in mutual funds instead of ETFs.

Second, if you decide to make withdrawals before retirement age or leave your job before retirement, 401(a) plans are subject to early withdrawal penalties.

Another downside to 401(a)’s is that some employers will not allow you to contribute more than 6 percent of your income per year on a pre-tax basis. This can make it difficult for individuals who want to save money each month because they do not qualify for the maximum contribution limit.

It is important to note that 401(a) plans do allow for in-service distributions. This means that if you have a 401(a) plan and leave your job, you can rollover your 401(a) balance to an IRA or other employer-sponsored retirement account.

Differences Between 401(k) and 401(a)

  • 401(k)’s have higher fees, while 401(a) plans have less stringent eligibility requirements.
  • 401(k)’s allow employer matching contributions if you are employed by a large company, while the same is not always true for a 401(a) plan.
  • 401(k) accounts are subject to an early withdrawal penalty, but 401(a) plans are not.
  • 401(k) plans allow for in-service distributions, but 401(a) plans do not.

Similarities of 401(k) and 401(a)

  • Both allow pre-tax contributions
  • Both require a dollar for dollar tax on distributions 

Pros and Cons of 401(k)

Pros of 401(k)

First, let us examine the pros of a 401(k). The primary benefit is that it allows employees to receive an employer match if they contribute a certain percentage of their income. This means that you can potentially double your investment from year to year without increasing the amount that you are contributing from your paycheck each payday.

In addition, 401(k) accounts have slightly higher contribution limits than traditional IRAs. For example, in 2015 you can contribute up to $18,000 to a 401(k) plan.

Finally, it is very easy to set up a 401(k) retirement account. All you have to do is fill out some paperwork at work and your employer will automatically enroll you in the plan.

Pros of 401(a)

Next, let’s analyze the pros of using a 401(a) plan. The main benefit is that you can contribute a maximum of $18,000 pre-tax per year no matter how much you make. For example, if you earn $30,000 and contribute 10 percent to your 401(a) each year, you reduce your taxable income to $27,000. This is extremely beneficial for individuals who live paycheck to paycheck because they can save more money without having to contribute a significant portion of their income each payday.

On top of this, 401(a) plans often have lower fees than 401(k) plans. This means you can potentially increase your retirement savings by thousands of dollars simply by switching to a 401(a) plan and maintaining the same monthly contribution amount.

Finally, 401(a) plans are extremely flexible when it comes to withdrawals. Unlike 401(k) plans, you are not required to take distributions once you reach the age of 70 ½. This means that you can leave your money in an account indefinitely without having to worry about severe tax penalties later in life.

Cons of 401(k)

The primary drawback of 401(k)’s is the lack of employer matching. Many employers do not offer 401(k)’s to employees, which means you are left with only your contributions to live off of.

Another downside of 401(k) plans is that they often restrict the types of funds you can invest in. For example, 401(k) plan providers typically only allow investors to choose from a list of up to 10 mutual funds instead of offering access to thousands of different ETFs like you would find on an IRA.

The final drawback is that 401(k) plans do not allow for in-service distributions. This means that you are required to leave your job before withdrawing any funds or risk facing massive early withdrawal penalties.

Cons of 401(a)

As mentioned earlier, there are several types of 401(a) plans. The main drawback is that not all 401(a)’s are created equally. Some employers will only allow you to invest in a provider-selected fund, which usually has higher fees and lower returns than other types of investments.

In addition, some 401(a) plan providers do not offer investment advice. In order to make the best decisions for your financial future, you need access to professional advice. If your employer does not offer financial planners or other types of advisors, opening an IRA account is the best way to give yourself more control over your retirement savings.

Lastly, 401(a) plans often require you to leave your money in for a certain amount of years before withdrawing. For example, many 401(a) plans mandate one-year minimum holding periods. This means you would have to leave your money untouched for a full 12 months before you can make any withdrawals without facing steep early withdrawal fees.

Choosing Between 401(k) and 401(a)

The best option is usually going to be a 401(k) plan, but if you do not have options, then a 401(a) might be your best bet. If given the opportunity, choose a 401(k) over a 401(a) because the fees and penalties are lower.

However, it never hurts to go for what is available; especially if that means saving on taxes while investing in your future. Consider all available options and choose the plan that fits best with your current lifestyle. 

In order to pick a retirement account, you have to consider the following: how much do I want to pay in fees? How much can I afford per month? What withdrawal rules does my 401(k) or 401(a) have?

If you are considering saving for retirement, then you should look into opening a 401(k) or 401(a) account. If your employer offers matching contributions it is definitely worth looking into, but if not there are still other options available to you.

Final Word

If you have an option between a 401(k) and 401(a), always go with the one with lower fees. If you have a 401(k) with your employer, always take advantage of the matching contributions. The only time you should choose a 401(a) is if you don’t have any other options.

In conclusion, 401(a)’s are advantageous to those who want the most control over their own retirement. 401(k) plans benefit those who want as little hassle as possible and can take advantage of employer matching contributions. 

This plan is also known as a qualified plan and is 100% employer-sponsored. The employee pretax contributions are deducted from their pay before calculating income tax, which means it reduces taxable income for the year.
This type of retirement account is offered by nonprofit organizations, such as universities. It allows employees to make pre-tax contributions and the employer usually matches the contribution.
The main difference is where you can invest your money. 401k's typically offer more investment options than 401(a) plans; however, some employers only offer investors access to a small number of limited funds with their 401(a), which provides fewer opportunities for growth.
401(k) offers more investment options; however, they also generally charge higher fees than other types of retirement accounts. Employer matching contributions can help offset high fees. You will be required to pay taxes once you start making withdrawals during retirement (when you are no longer employed).
The main benefits of a 401(a) include no mandatory withdrawals and access to employer matching contributions. However, you will be limited in terms of your choice of investments - as with most nonprofit organizations, their funds tend to be more conservative than those used by for-profit organizations.
True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.