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.
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).
- 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- The amount can be withdrawn as a lump-sum or through annuity.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.
- 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 Thus, until the post-retirement period (or until they are withdrawn), the amount is tax-deferred.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- If the amount is withdrawn prior to the retirement age (as mentioned in the plan), the employee may face penalties.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.
▲ 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.
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.