Accessed March 20, 2020. Contributions to a 401(a) are either mandatory or voluntary. Although most 401(k) plans offer different types of mutual funds as their investing choices, 401(k) plans have the option to offer other choices. The two primary types of defined-contribution retirement savings plans offered by employers are 401(k) plans and 401(a) plans. Employees choose how large they want this pre-tax contribution to be. While participation in a 401 (k) plan is … These plans are for employees of public schools and tax-exempt organizations. Brokerage companies also provide 401(k) plans on behalf of employers. Roth 401(k)s, on the other hand, are funded with after-tax dollars and provide no upfront tax benefit. Another difference between a 401(k) and a 403(b) is the investment choices.  Accessed March 20, 2020. This is not the case with a 401 (a). In order to set up a 401(a) or a 401(k), the employer must create a written plan. In other words, employees have the power to defer a portion of their wages to their 401(k) savings account before taxes are applied. By contrast, with a 401(k), an employee will contribute only if there’s a company match policy. With a 401 (k) plan, an employee chooses if and how much to contribute. It can match a set amount or percentage of employee contributions. This is because 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plan accrue on a tax-deferred basis and, in the case of traditional 401(k)s, are taxed as regular income when they are withdrawn. The 401(a) vs. 401(k) comparison extends to contributions. A 401(a) plan is an employer-sponsored money-purchase retirement plan funded with contributions from the employee, the employer, or both. Participating in a 401k is not compulsory but it is mandatory to partake in 401a. A 401(a) plan is normally offered by government agencies, educational institutions, and nonprofit organizations, rather than by corporations. While participation in a 401(k) plan is not mandatory, with a 401(a) plan, it often is. TIAA-CREF Asset Management. A 401(a) plan, also known as a money purchase plan, is a retirement plan available to government and nonprofit employees. 401 (a) plans are generally offered by government and nonprofit employers, while 401 (k) plans are more common in the private sector. Accessed March 20, 2020. For-profit companies or corporate employers offer 401(k) plans to their eligible employees, while government employers, non-profit organizations and educational institutions typically offer 401(a) plans. The 401(a) plan, on the other hand, is only offered to specific employees as incentive for them to continue their work within the organization. For the 401(a) plan, the employer must make financial contributions to the plan. Some 401(a) plans have mandatory contributions that specify exactly how much employees must invest in the plan. A great part about this plan is that its contributions are tax-advantaged. Offer investment vehicles chosen by the employer; 3. Both 401K and 401A are accounts opened by employers as an option for their employees to save money for retirement. For help with your own retirement goals, consider working with a financial advisor. A 408(k) account is an employer-sponsored, retirement savings plan similar to but less complex than a 401(k). There are two basic types—traditional and Roth.   403(b) plans can only offer mutual funds and annuities. 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., The employer sponsoring the 401(k) plan selects which investment options will be available to participants, though as a function of their fiduciary duty, they need to be careful to offer a wider range of options than the sponsors of 401(a) plans often do. Private employers set up 401 (k) plans, while government organizations use … Many small-business owners think that 401(k) plans are prohibitively expensive, but that's not true. Both 403b and 401k plans allow employees to make pre-tax contributions towards a tax-deferred account. Employees, thus, invest a desired percentage of their paycheck, before taxes, into a 401(k). 401(a) vs 401(k) As with a 401(k) plan, both the employer and the employee may make contributions into a 401(a) plan. Employee contributions to 401(a) plan are determined by the employer, while 401(k) participants decide how much, if anything, they wish to contribute to their plan. Don't require employers to make contributions of any amount to workers' accounts. 204. An employee savings plan is an employer-provided tax-deferred account typically used to save for retirement, such as a defined contribution plan. However, employee contribution isn’t always mandatory. Voluntary Savings With a 401 (k) plan, you decide how much of your paycheck you want to invest. Another big difference in the battle of 401(a) vs. 401(k) plans is where the contributions come from. It’s important to remember that 401(k) plans are a common offering from for-profit businesses to all employees. During this process, the employer may either choose to establish and maintain the account or consult a financial institution to help preserve the account. 401 (k) plans are offered by private-sector employers, while 401 (a) plans are reserved for government and nonprofit employees. Enrolling in one of these plans is an important step toward creating a secure financial future in your golden years. If you work in higher ed, chances are, you have one. But there’s also the 401(a) plan to consider. It ultimately must create a record-keeping formula for the plan and inform employees of the plan’s details. Are established at an employer's discretion; 2. 401 (a) plans are regularly used as an incentive to keep employees longterm, which is why you’ll notice below that they offer generous benefits and very high contribution limits. Employers create 401(a) accounts on behalf of employees and decide how much employers can contribute, whether to contribute on the employees' behalf and whether the accounts are funded with pre-tax or after-tax earnings. The main difference is that private companies typically sponsor 401 (k)s. Meanwhile, government agencies, educational institutions and non-profits typically sponsor 401 (a)s. Investopedia uses cookies to provide you with a great user experience. Withdrawals from a Roth 401(k) are generally tax-free., Office of the the Law Revision Counsel. Generally, when it comes to retirement savings plans, you don’t have a choice in the plan your employer offers. U.S. Congress. Businesses and private-sector employers offer 401(k) plans to their employees. Bank of America® Travel Rewards Visa® Credit Card Review, Capital One® Quicksilver® Cash Rewards Credit Card Review, 7 Mistakes Everyone Makes When Hiring a Financial Advisor, 20 Questions to Tell If You're Ready to Retire, The Worst Way to Withdraw From Your Retirement Accounts. 401(a) plan contribution amounts are set by the employer, while the 401(k) allows the employee to decide what they prefer to contribute. You know you should be socking money away for your golden years, but you need to understand the savings vehicle your employer offers. We’ve already covered that when it comes to contributions for your 401(a), an employer determines whether the contributions are made on a before or after-tax basis. By doing so, they’re hel… A 401 (a) plan is a type of employer-sponsored retirement plan that functions similarly to a 401 (k) plan. A 401(a) plan is an employer-sponsored money-purchase retirement plan funded with contributions from the employee, the employer, or both. We also reference original research from other reputable publishers where appropriate. Employee participation is often mandatory. Interested in investing in your retirement? Compare the Top 3 Financial Advisors For You. A Roth 401(k) is an employer-sponsored investment savings account that is funded with post-tax money, which means that withdrawals in retirement are tax free. For example, employers set the eligibility requirements. It can also be voluntary. "401(k) Plan Overview." 401(k) sponsors are usually private companies, while 401(a) sponsors are typically government agencies, non-profit organizations, and educational institutions. The conventional wisdom regarding the Solo 401(k) vs SEP IRA question is that self-employed people should choose the Solo 401(k) because … You’re eligible to receive the credit as long as you’re 18 or older, you’re not a full-time student and you’re not claimed as a dependent on someone else’s return. In addition, payroll providers, such as Gusto or ADP, can also offer employers 401(k) plans. Government entities administer 457(b) plans for employees and all contributions are made on a pre-tax basis. 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.. Employee contributions always vest immediately. Jim has run his own advisory firm and taught courses on financial planning at DePaul University and William Rainey Harper Community College. There are many other noteworthy distinctions between a 401(a) and a 401(k). Although both are employer-sponsored qualified benefit plans, they differ in other important ways: Chances are also pretty good that your provider is TIAA or Fidelity. Educational institutions often offer a related plan called a 403(b) plan. The employer can choose to match those contributions, either partially or in full. 401a vs. 401k - Major Differences. Plans typically offer 15 to 30 investment options, though research has indicated that too many choices confuse participants., However, with the passage of the SECURE Act of 2019, employees may find more annuity plans offered as investment options in their 401(k) plans. 401 (a) plans are typically offered by nonprofit and government employers, whereas 401 (k) plans are often from the private or individual sector. If the employee voluntarily contributes to the account, both those contributions and the earnings from them are immediately fully vested. Unlike the 401k, which offers a normal limit of $18,500 in the 2018 tax year, the 401a plan permits contributions up to $55,000 per year to be made to the plan. When adding to an employee’s plan, the employer has options. "How America Saves 2019," Pages 60-61. These employers also hold the power to require employees to put money into their 401(a) accounts as well. In most cases, sponsors of 401(a) plans enjoy greater control in terms of plan structure. You can even choose not to participate in the plan and save for your retirement another way. "Employers might not want to hassle with the discrimination testing in a 401 (k) … As of 220, employees can contribute up to $19,500 annually to a 401(k). While the two plans are similar in their goals, they differ in significant ways. 403bs vs 401k: Major Differences. You can learn more about the standards we follow in producing accurate, unbiased content in our. "Government Retirement Plans Toolkit." However, employees with 401(a) plans can also contribute to a 403(b) plan and a 457 plan simultaneously (more on those plans in the 401(a) vs Other Retirement Plan Options section). Government employers and non-profits typically provide this retirement plan. The primary difference between a 401 (a) vs. a 401 (k) is that the 401 (a) is for employees of governments, educational facilities and nonprofit organizations, whereas a 401 (k) is for employees of private-sector companies. But employers must always contribute to the account. Employees who voluntarily contribute to their 401(a)s, 401(k)s and other IRS-qualified retirement plans may also qualify for tax credit. These include white papers, government data, original reporting, and interviews with industry experts. A 401(k) plan is a tax-advantaged retirement account offered by many employers. However, any 401(k) withdrawals the employee makes from the account in retirement are taxed. Vanguard. Accessed March 20, 2020. So much for making sense of retirement plans fresh-out-of-college graduate. The plan's investment choices are determined by the employer and tend to be limited. Permit workers to choose among a range of investment funds at various levels of risk; and 5. 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