What is a 401(a)?
A 401(a) is a retirement savings plan that is commonly offered by public employers, such as nonprofit organizations, government agencies, and educational institutions. It’s a unique type of retirement account, custom-designed to fit employees’ needs.
401(a) plans act as an added incentive for employees to stay with an organization. The sponsoring employer establishes the contribution amounts and vesting schedules, providing a level of customization to suit the organization’s needs and financial abilities.
It’s also common for employee participation to be mandatory, helping ensure that every eligible employee has a retirement savings plan in place. Voluntary contribution set-ups are also possible with most 401(a) plans.
In terms of investment choices, a 401(a) typically includes a variety of options such as mutual funds and money market investments. But on the whole the investment menu tends to be more conservative than that of most private employers. Risk management is of top concern for both the employer and the plan participant.
For more details, see the IRS guide on 401(a) savings accounts.
What is the 401(k)?
The 401(k) is a retirement savings plan offered predominantly by private-sector employers. The beauty of a 401(k) plan lies in its tax advantages. Specifically, employees make pre-tax contributions from their recurring paychecks, which means a significant tax deduction on their annual tax returns.
401(k) plans also typically offer a broad variety of investment options, sometimes as many as 15 to 40, ranging from mutual funds to company stock — and in certain, newer plans, even ETFs (Exchange Traded Funds). Some 401(k) plans also provide access to annuities.
For more information on what to do with your 401(k) when changing jobs, see our other articles:
Differences Between the 401(k) and 401(a)
Now let’s put the 401(k) and 401(a) side by side. While they may seem similar at first glance, there are distinct differences that could influence your retirement savings decision.
Key 401(k) characteristics
- Contributions are made on a pre-tax basis, which could lead to tax savings in the year the money is contributed (assuming you have a traditional 401(k) and not a Roth 401(k)).
- Designed primarily for for-profit companies.
- Typically offers a wider range of investment options, which may or may not include ETFs.
- Employees have the liberty to choose how much to contribute and how to invest.
- It’s a tax-deferred retirement plan, meaning the money grows without being taxed until it’s withdrawn. Withdrawals are subject to ordinary income tax.
- Total 2023 contribution limit: $66,000 ($73,500 for employees 50 and older via catch-up contributions).
Key 401(a) characteristics
- Primarily offered to employees of non-profit organizations and government agencies — entirely different types of employers than those that would offer a 401(k).
- Features fewer investment options, usually customized to suit the needs of the organization.
- Participation is often mandatory, so all eligible employees have a retirement savings plan.
- Employers typically decide how contributions are made (i.e., fixed dollar or percentage), and their corresponding tax status (pre-tax or post-tax).
- Total 2023 contribution limit: $66,000 ($73,500 for employees 50 and older via catch-up contributions).
Can You Take Money Out of a 401(a)?
The short answer is yes, but there’s a catch. Withdrawing from a 401(a) before you reach the age of 59.5 generally incurs a 10% early withdrawal penalty.
The same rule applies to 401(k)s. Early distributions are usually subject to a penalty because the withdrawn amount is treated as additional income.
If you decide to withdraw from your tax-deferred savings plan, you’ll also miss out on tax-advantaged growth and earnings, which, over time, could be substantial.
So, in essence, it’s best to let your savings mature before you tap into them. At the same time, emergencies can and do occur, so it’s important to know that your retirement plan could be a source of cash in the event it’s absolutely necessary.
In Conclusion
Where you’re being hired has a lot to do whether you’ll be offered a 401(k) or 401(a) retirement account option. While there are some key differences between these types of retirement plans, it’s advised that you ask a prospective employer about their key aspects, such as eligibility, vesting schedule, defined contribution plan, and other factors.
Once enrolled, you may also want to speak with a financial advisor on how to best maintain these accounts for a comfortable retirement.
Do you have an old retirement account you’re no longer contributing to? Capitalize can help you roll an old employer-sponsored account into a beneficial after-tax account like a Roth IRA. Our team can walk you through our rollover services so you can consolidate that money and, in the long run, maximize your savings.
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