If you’re wondering how to choose between a 401(a) vs. 401(k), you’ve come to the right place. While similar in many ways, the two plans have certain important differences.
The 401(k) retirement plan has largely replaced the traditional pension plan, partly because it’s the employee, and not the employer, who mainly contributes to a 401(k).
About 55 million Americans are active 401(k) participants, with 401(k) plans holding an estimated $5.7 trillion in assets, according to the Investment Company Institute. But in addition to 401(k) plans, some employees have the option of contributing to 401(a) plans.
What is a 401(k) plan?
A 401(k) allows employees to invest pretax earnings into retirement savings. The employer sets up the plan, which usually includes a range of investment options. The employee decides how much to contribute to the 401(k).
In some cases, employers will match employee contributions, although this is not required. All assets are invested on a tax-deferred basis and taxed when withdrawn from the plan.
What is a 401(a) plan?
A 401(a) is a custom-designed retirement plan, often used by employers as an incentive to retain valued employees. The employer sets the employee contribution rate and determines investment choices.
The employer also contributes to the plan in addition to employee contributions. Contributions may be tax deferred or post tax, depending on the plan. While 401(k) plans are usually offered to the entire workforce, a 401(a) is generally offered only to select employees.
Pro tip! Keep in mind who offers what:Usually only private corporations offer 401(k) plans. In contrast, it’s typically government agencies, educational institutions, and nonprofit organizations that offer 401(a) plans.
If you have a choice between a 401(a) and a 401(k), you should consider contribution limits. As of 2018 the maximum annual contribution for a 401(k) is $19,000. The maximum limit for a 401(a) is 100 percent of an employee’s earnings or $56,000, whichever amount is lower.
If you’re 50 or older and want to make catch-up contributions to your retirement plan, bear in mind that 401(a) plans have no catch-up provisions, while a 401(k) allows up to $6,000 in catch-up contributions annually.
The bottom line
Any decision on retirement savings needs to be carefully considered. Be sure to compare 401(a) and 401(k) plans with other types of retirement plans.