Understanding the difference between 401(a) vs. 401(k)

Saving for a large retirement nest egg is a priority for many American workers, but how to go about doing that looks different for each person. Some people save through an employer- sponsored 401(k). Or, if you are a government or qualified employee, you may be eligible to contribute to a 401(a) plan instead.  

While both plans contain “401” in their names, they work differently. People considering employment with a retirement plan that works for them should know the differences between these plans, so you can make a more informed decision.

401(a) vs. 401(k): Who contributes?

Under a 401(a), employees can contribute up to 25% of their pretax income. Employee contributions are entirely voluntary. However, employer contributions are mandatory. Employers do get to choose, though, whether they will contribute a percentage of the employees’ income or a specific amount.

Under a 401(k), employee contributions are entirely voluntary, but so are employer contributions. Employers are permitted to offer matching opportunities, such as 3% of an employee’s contributions. As with a 401(a), these contributions are made with pretax dollars.

401(a) vs. 401(k): What are the limits?

Contribution limits are subject to change, but as of 2021, the total contribution limit for employer and employees for a 401(a) is $58,000 annually. The contribution limits for a 401(k) are $19,500 (with an option to contribute an additional $6,500 if you are age 50 or older).

Employees may contribute to other eligible plans to further supplement their savings if they wish, such as an individual retirement account (IRA).

401(a) vs. 401(k): What are your investment options?

401(a) plans offer more diverse investment options. This allows you to fine-tune your savings strategy with more freedom to pursue conservative or aggressive opportunities that suit your strategy best.

Most 401(k) plans also include a variety of options, but these are limited to those that are selected by the employer that is offering the plan.

401(a) vs. 401(k): When can you withdraw?

Eligibility to make withdrawals from a 401(a) or 401(k) without penalty begins when you reach the age of 59 ½. Early withdrawals are subject to penalties and will be counted as taxable income during the year you make the withdrawal. 

There are exceptions for early withdrawal. For example, if you fully retire from your job at 55 or older, you may start making withdrawals before the age of 59 ½. One may also be eligible for hardship distributions, loans and other early withdrawal opportunities.

Talk to a ProVise CFP® professional about your retirement savings

Are you trying to save up as much as possible for your retirement, but feel like you do not have any direction? Our financial professionals can act as your guides in the complex fiduciary landscape to help you navigate your savings in the right direction.

At ProVise Management Group, our CERTIFIED FINANCIAL PLANNER™ professionals can get to know you and your current financial circumstances, goals, risk tolerance and personal values to help you develop a plan that works for you. We can also create a written plan for you at a fiduciary standard of care. All our written plans come with an unconditional money-back guarantee. If you are unhappy with your written plan, you can return it to us, and we will refund 100% of the fee paid.

Are you ready to talk to a professional about planning for your retirement? Contact ProVise today to schedule a complimentary consultation.