401(a) vs. 401(k): What’s the Difference?

The main distinction involves the kinds of employers who offer them

Reviewed by Thomas J. CatalanoFact checked by Vikki VelasquezReviewed by Thomas J. CatalanoFact checked by Vikki Velasquez

401(a) vs. 401(k): An Overview

The two primary types of defined contribution retirement savings plans offered by employers are 401(k) and 401(a) plans. They take their names from Section 401 of the United States Internal Revenue Code, which defines them.

The principal difference between a 401(a) plan and a 401(k) plan is who offers them. They also differ based on contributions and investment choices.

Key Takeaways

• 401(a) plans are generally offered by government and nonprofit employers, while 401(k) plans are more common in the private sector.
• Often enrollment in a 401(a) plan is mandatory for employees. Participation in a 401(k) plan is not mandatory.
• Employee contributions to the 401(a) plan are determined by the employer, while 401(k) participants decide how much, if anything, they wish to contribute to their plan.

401(a)

A 401(a) plan is typically offered by government agencies, educational institutions, and nonprofit organizations. These plans are usually custom-designed and can be offered to key employees as an added incentive to stay with the organization. The employer usually sets the employee contribution amounts, and the employer is also required to contribute to the plan. Contributions can be either pre-tax or post-tax.

Because the sponsoring employer establishes the contribution and vesting schedules in a 401(a), these plans can be set up in ways that encourage employees to stay. If employees leave, they can usually withdraw their vested money by rolling it over into another qualified retirement savings plan or by purchasing an annuity.

The employer determines the plan’s investment choices, which tend to be limited. Government-sponsored 401(a) plans, in particular, may include only the most conservative investment options.

Important

Educational institutions often offer a related plan called a 403(b) plan.

401(k)

Private-sector employers usually offer 401(k) plans. Employees decide how much they wish to contribute, up to limits set by the IRS, and many employers match at least a portion of their employees’ contributions, although that is not legally required.

A traditional 401(k) allows employees to contribute pre-tax dollars from their paycheck to the account, which reduces their taxable income by the amount of the contributions.

The employer sponsoring the 401(k) plan selects which investment options will be available to participants. However, as a function of their fiduciary duty, the employer needs to offer a broader range of options than the sponsors of 401(a) plans often do. Plans typically offer around 30 investment options, though research has indicated that too many choices confuse participants.

With the SECURE Act of 2019, employees may find more annuity plans offered as investment options in their 401(k) plans. The SECURE Act now protects employers from being sued should the annuity insurer fail to make annuity payments to the plan participants. Assets in a 401(k) plan accrue on a tax-deferred basis and, in the case of traditional 401(k)s, are taxed as regular income when they are withdrawn. Withdrawals from a Roth 401(k) are tax-free, as long as the account has been held for at least five years.

Note

Roth 401(k)s are funded with after-tax dollars and provide no upfront tax benefit.

Key Differences

The main difference between a 401(k) and 401(a) plans is the type of employer that offers them, and whether there are contribution requirements.

If you work for a nonprofit or have a government job, you might have a 401(a) plan as part of your benefits package. Employers that offer 401(a) plans make it mandatory for their employees to enroll. Employees must also contribute an amount set by the employer.

If you work for a for-profit company that has a 401(k) retirement plan available, you can choose whether you want to enroll, and you can also choose your contribution amount.

Tax rules may differ between the two plans. If you have a 401(a), your employer may structure your plan’s contributions as either after-tax or pre-tax dollars. It will depend on the employer you work for, because the employers, not the employees, structure the way taxes are handled with a 401(a).

A 401(k) is a tax-deferred retirement plan, and traditionally, your contributions come directly out of your pre-tax paycheck. You pay income taxes on your withdrawals during retirement at your ordinary tax rate. The exception is the Roth account, which uses after-tax contributions. You pay taxes upfront so qualified withdrawals are tax-free in retirement.

What Happens to My 401(a) When I Quit?

You have several options for your 401(a) if you leave your job. You may be able to leave the account where it is. Or you could roll it over into an individual retirement account (IRA). Or you could cash it out. If you choose to cash it out before you turn 59 ½ years old, you will be subjected to a 10% penalty on the withdrawal, plus owe taxes on the funds based on your tax bracket.

Is It Better to Contribute to a 401(k) or a Roth 401(k)?

Whether one is better than the other is up to your individual situation. The difference between a 401(k) and a Roth 401(k) is how the accounts are taxed. The general rule of thumb is to ask yourself: do you want to pay taxes now, or during retirement? When will your income tax rate be lower?

If you contribute to a traditional 401(k), you benefit from not being taxed on the amount upfront. However, when you reach retirement with a traditional 401(k) account, you must pay taxes on your withdrawals.

With a Roth 401(k), you pay with after-tax income, meaning you don’t get the tax advantage right away— but no taxes are owed in retirement, as long as you’ve had the account for at least five years.

Can You Take Money Out of a 401(a)?

Yes. You can take your money out of a 401(a) but, similar to a 401(k), if you make withdrawals before age 59½, you will have to pay a 10% penalty. In addition, any funds you remove from your 401(a) will be treated as income and you will owe federal and state taxes on it.

The Bottom Line

The main thing that separates 401(a) and 401(k) plan is who offers them, and who gets to decide how much is contributed, and how they are taxed.

401(a) plans are generally offered by the government and nonprofit employers. It’s the employer who determines the plan’s investment choices, which may be limited. Government-sponsored 401(a) plans may, for instance, include only the most conservative investments. 

401(k) plans are more common in the private sector. While the employer selects the investment options available to employees, the range of investment options is most often customizable to suit the employee’s risk tolerance profile and investment objectives.

Regardless of the type of retirement savings vehicle an employer offers, these plans can be the foundation of successful retirement planning.

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