401(a) Vs. 401(k)

401(a) and 401(k) are types of retirement plans under the respective sections of the Internal Revenue Code (IRC). The 401(a) vs. 401(k) comparison is given in the WealthHow write-up below.

Fast Fact
You may be eligible to take a loan from your 401(k) plan. Many plans offer to borrow half of your vested account balance, up to USD 50,000.

Retirement is a very important phase of life; retirement planning must ideally begin right from the day you start working. There are many retirement plans under the Internal Revenue Service (IRS), prominent among those include the 401(a) and the 401(k). Many get confused between the two, in fact, there is confusion regarding the choice of the most appropriate retirement plan. Several factors, like tax, withdrawal, amount, penalty, etc., have to be analyzed before choosing one. Although both the plans mentioned above are pension plans, there are minute differences between the two. The paragraphs below explain the difference between 401(a) and 401(k).

401(a)

The 401(a) is a retirement account under the subsection 401(a) of the Internal Revenue Code (IRC).
Under this plan, contributions can be made for the employee or employer (or both).
The contribution amount as well as the eligibility criteria are dependent on the employer.
The plan is not restricted to a single account; many 401(a) plans can be created with different contribution amounts.
The amount can be withdrawn as a lump-sum or through annuity.
Any qualified pension plan can be considered a 401(a) plan, though a lot of organizations primarily use it as a retirement incentive to retain employees. It can also be called an employee stock ownership plan.
401(k) may be considered as a 401(a), but not vice versa.

401(k)

The 401(k) is a pension account under the subsection 401(k) of the Internal Revenue Code (IRC).
It is a tax-qualified plan under which an employer provides retirement saving contributions.
A part of the employee’s salary is deducted prior to the taxation formalities. Thus, until the post-retirement period (or until they are withdrawn), the amount is tax-deferred.
This plan is offered to eligible employees and the employers may make a matching contribution on their behalf. They may add a profit-sharing feature as well.
If the amount is withdrawn prior to the retirement age (as mentioned in the plan), the employee may face penalties.
The plan is more like a retirement incentive for employees. The amount that is deferred to on this plan is not subject to federal income tax.

401(a) Vs. 401(k)

Contribution Amount

▲ The employer is responsible for setting up the contribution amounts. He does this for the employees as well as for himself. Generally, the employee may not have a say in how much amount has to go into the plan. Contribution limits change every year and are generally higher than 401(k).

▲ The employee can choose the contribution amount. He can decide the part of his salary that he wishes to put into the 401(k) plan. If the employer wishes, he may incorporate a profit-sharing feature into the plan. Contribution limits depend on the annual compensation.

Sponsoring Employers

▲ It is primarily used by government employers.

▲ It is used by major corporates and private employers.

Employees

▲ It is available only for a selected number of important employees, as an incentive.

▲ It is open to all the employees of the company. The contribution limits, vesting schedules, etc., are all the same.

Savings

▲ Since the employer sets the contribution amounts and limits, if he decides to include a savings plan, the employee will be forced to accept whatever levels the employer sets for the same.

▲ The employee decides the savings levels. He will make up his mind regarding the contribution limit, salary to be deferred, etc.

Investment Options

▲ The employer controls the range of investment options. The employee may have less of a contribution and choice while selecting the investment. In fact, government employers generally have a restriction on risky investments; only the secure ones are listed, giving lesser scope to the employee.
▲ The employee has a choice to select from a variety of investment options that are chosen by his employer. He can invest the amount in whatever scheme he wishes to, there is no restriction.

Withdrawals

▲ You can withdraw money from your account after your retirement or after you leave that particular job. While in employment, as per the IRS rules, you can withdraw after-tax contributions as well (or even after you are 70 years, 6 months). The money can be rolled over to a new plan after you leave your job.

▲ Its withdrawal strategy is almost similar to that of 401(a). You can withdraw cash after leaving your job or after retirement. You also have loan options. You will be subject to penalty though, if you withdraw money prior to age 59 (and 6 months hence).

Early Withdrawal Penalty

▲ Early withdrawal penalty is generally 10% . The withdrawals are also subject to income tax.

▲ It is subject to a 10% penalty as well. If you receive the amount prior to rolling it over to a new account, the employer is supposed to withhold 20% of that balance as federal tax.

Tax Consequences

▲ This is a tax-deferred account and the money is not subject to taxation as long as it stays in the account. The moment you start withdrawing the money, it is subject to state and federal income tax.

▲ Investments in this account are tax-deferred as well. The amount that is deferred to on this account is not subject to income tax, but a 7.65% payroll tax payment is mandatory. And of course, tax is paid on the amount withdrawn prior to retirement.

Annual Compensation

▲ The annual compensation limit is decided by the employer, since he decides how much can be contributed.

▲ The annual compensation limit helps the employee decide how much contribution amount he would like to put into his account from annual compensation. In a 401(k) plan, this is decided by the employee himself.

A retirement plan should always be thought over and carefully chosen. 401(a) and 401(k) are both funded by the employer, so they will not have government insurance for the assets. In case the employer experiences a financial crisis, he may have a problem in sponsoring. This issue may be solved with funding liabilities of course, however, employees have to ensure the proper distribution of their assets. In case they have left the previous job, they need to decide whether the assets may remain in the old plan or can be rolled over into a new one.