401(a) vs 401(k): What’s the Difference? Is One Better Than the Other?

401(a) vs 401(k): What’s the Difference? Is One Better Than the Other? was originally published on The Muse, a great place to research companies and careers. Click here to search for great jobs and companies near you.

Are you ready to start investing in your retirement? While you might know that you should save for when you’re too old to work, understanding the savings options of 401(a) vs. a 401(k) can feel like a job in and of itself.

What’s the difference between a 401(a) and 401(k)? Is a 401(a) better than a 401(k)? Can you contribute to either option—and if so, how? Here’s what you need to know to make an educated decision about investing for your golden years.

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What is a 401(k)?

When most people think of retirement plans, the first thing that often comes to mind is a 401(k)—defined by the IRS as a “contribution plan where an employee can make contributions from his or her paycheck either before or after-tax, depending on the options offered in the plan.”

According to the Investment Company Institute, Americans had $7.4 trillion invested in 401(k)s in 2023. These plans are provided by for-profit companies or corporate employers and offered equally to all full-time employees.

Contributions go into a 401(k) account, typically with the employee choosing investments based on the options provided by their employer within the plan.

“401(k) plans usually offer a limited number of investment options for plan participants to choose from, often with popular choices like a low-cost S&P 500 index fund, target-date retirement fund series, and bond/income funds,” says Riley Adams, CPA and founder of WealthUp, a personal finance, investing, and retirement planning firm.

By default, if you enroll in a plan and and don’t specify where you want your contributions invested, you’re often placed into the most suitable target-date retirement fund based on your age and expected retirement date. Employees can customize their account to pick that better align with their personal financial goals and needs.

“If you leave your employer, you can leave these funds in the account and remain invested, take the funds with you into your new employer’s 401(k) plan, or roll them into an individual retirement account (IRA),” Riley says.

Typically, employers offer to match the employee’s contributions up to a certain percentage. Employees can choose their contribution amounts from their paychecks, up to $23,000 annually. Several factors influence the growth of a 401(k), including your annual contribution, company matching, investment performance, and the time until you retire.

What’s the difference between a traditional 401(k) and a Roth 401(k)?

When it comes to 401(k) plans, there are two options—traditional or Roth—and the main difference is in how they’re taxed. With a traditional 401(k), your contributions are taken from your wages before any taxes are applied, but any withdrawals you make in retirement are subject to taxes. 

With a Roth 401(k), your plan contributions are made after taxes, so there’s no tax deduction for the contribution year, but the advantage is that any withdrawals that you make in retirement will be tax-free.

Whether you choose a traditional or a Roth 401(k), you have to be at least 59 1/2 years old or meet other IRS criteria before you can withdrawal the money without any penalties.

What is a 401(a)?

Whereas a 401(k) is offered by for-profit companies, a 401(a) is a voluntary retirement and benefits plan offered by nonprofit organizations, government agencies, and educational institutions and is often provided to employees as a loyalty incentive. This plan can take many different forms—for example, a money purchase pension plan, profit sharing, or stock options.

“Think of 401(a) plans as a public or nonprofit employer’s version of the often generous incentives awarded to corporate executives—though likely far less generous,” Riley says. “Given the types of employers who offer 401(a) plans, they generally can’t provide as competitive tax-advantaged investment incentives as corporations’ stock options, common stock, or any other form of ownership in their employer. The 401(a) plan is one possible solution to attract and retain key employees the organization deems essential.”

What are the cons of 401(a) plans?

The contribution terms are dictated by the employer, who must also contribute to the plan. This includes whether the contributions are pre-tax or after tax, as well as how the employer will contribute—whether with a fixed dollar or percentage amount or by matching the employee’s contribution.

The maximum contribution limit for a 401(a) is $69,000 annually, which includes contributions from both the employee and the employer. Similar to a 401(k) plan, there is also a 10% penalty if you withdrawal funds from your plan before the age of 59 1/2.

The differences between 401(k) and 401(a) at a glance

Still confused about 401(k) vs. 401(a)? Here are the key differences:

1. Offerings

While 401(k) plans are offered from for-profit companies or corporate employers equally to all full-time employees, 401(a) plans are offered by not-for-profits, government agencies, and educational institutions to specific employees as an incentive for them to keep working with the organizations.

2. Contributions

With a 401(a) option, employers are required to contribute an amount that they set, but employees aren’t required to contribute. With a 401(k) retirement plan, all contributions are voluntary, from both the employer and the employee, with the employee deciding how much of each paycheck they want to contribute and the employer deciding what percentage of that amount that they want to match.

“401(a) plans also have much higher employee contribution limits as compared to a 401(k) plan,” Riley says. “While the combined annual contribution limit for a 401(k) is $69,000 in 2024, that splits $23,000 for employees and $46,000 for employers. Therefore, if your employer only offers a smaller match, you can contribute the full $23,000 as an employee and only up to the employer match. 401(a) plans allow $66,000 overall without regard to who contributes (employee or employer).”

3. Taxes

Contributions for 401(k) plans are pre-tax or after-tax amounts decided by the employee, while employers decide whether or not the contributions are pre-tax or after tax with 401(a) plans.

Is a 401(a) better than a 401(k)?

Since each retirement plan is offered to employees in different kinds of organizations, you likely won’t have to choose between them, but will instead have to choose how much to contribute.

Some things to consider include:

  • How much you can afford to contribute each month
  • What you will have to pay in any fees or taxes
  • Whether or not your employer will be contributing to the plan

Regardless of which plan is available to you, what’s important is that you do take advantage of the chance to start saving for a retirement where you can have financial security and peace of mind.

“It’s always been my personal motto to ‘save ‘til it hurts,’ especially when you’re young,” Riley says. “This allows for far more time to compound the contributions over multiple decades.”