401a vs 401k: The $114,000 Difference (And More)

Today we’re going to look at the differences between two retirement plans: 401a vs 401k.

These two retirement plans have some similarities, and yet a few key variations that make a substantial difference in what you can and can’t do with them.

We’ll start with a brief overview of the core differences between a 401(k) vs 401(a), then go more in-depth on both, including contribution limits and other “hidden” perks the 401(a) offers. (Hint the difference could mean $114,000 per year)

Let’s get going.

401a Vs 401k

While they both get their names from IRS code 401, the main difference lies in what types of employers offer them.

You can’t get a 401(a) plan in the private sector (typical forprofit company jobs). And there are a few additional rules that vary, such as contribution limits, other investment options, opt-in vs. mandated participation et cetera.

We’ll go a bit more in-depth below.

401(a) Plan

401(a) plans are typically offered by nonprofit and government employers, whereas 401(k) plans are often from the private or individual sector.

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.

A unique attribute of 401(a) plans is that they often require participation for employees, unlike 401(k) plans that are optional and must be opted-in. And similarly, some that mandate participation also requires the employer to contribute a portion of that contribution on their end.

There are some versions that participation is not mandated, and in those varieties you’ll have one chance, in the beginning, to set up and choose what percentage of your income you’d like to allocate to investments or to not contribute at all.

If you can at all swing it, you want to choose the maximum amount because you won’t be able to change it later… even if you chose not to invest at all. You’re locked in.

The last option is rarer and allows you to contribute after-tax money, as well as the flexibility to change percentages of income you invest— you can start, stop, increase or decrease like a 401(k) plan. In this 401(a) plan variation when you go to withdraw in retirement, only the gains or growth are taxed, not the principal investment.

Additional Benefits:

What’s great about 401(a) plans is that they typically do not inhibit you from participating in other retirement plans like a 401(k) or 403(b)— whichever your company may offer.

In fact, depending on where you work, you may have the added benefit of being able to participate in a 403(b) (tax-sheltered annuity plan) and a 457(b) (deferred compensation plan).

If you’re one of the lucky ones with this “hidden perk”, you’d be able to contribute $133,500 each year into these plans alone. That is a substantial retirement benefit that few have the option of.

And that means you would be able to contribute $114,000 per year more than someone who only had a 401(k) plan. 

That could be worth many millions more in your retirement account over 30-40 years.

401(a) Plan Contribution Limits

Here’s how those contributions limits break-down:

401(a) Contribution Limit: $57,000 in 2020

403(b) Contribution Limt: $57,000 in 2020 (Could be $19,500 depending on your options)

457(b) Contribution Limit: $19,500 in 2020

401(k) Plan

Whereas 401(a) plans are offered by government and nonprofit sectors, 401(k) plans are offered traditionally in the private-sector. That’s the greatest differentiating factor, but there are a few more.

401(k) plans are not mandated, like most 401(a) plans are— instead, they are optional to opt-in. Many companies will offer a company match that pays in “free” money to match what you put in up to a certain limit (usually around 4-6%). 

Most 401(k) plan contributions are made with your pre-tax earnings which give you a tax deduction up front for the year instead of the more rare Roth 401(k) where your contributions are made with after-tax dollars that give you no tax benefits upfront. 

Instead, withdrawals from a Roth 401(k) after age 59 and a half are generally not taxed, whereas traditional 401(k) withdrawals are taxed as normal income.

401(k) Plan Contribution Limits

401(k) Contribution Limit: $19,500 in 2020. 

There is also a catch-up limit of $6,500 for employees over the age of 50 which equals $26,000 in total in 2020.

Conclusion:

For almost everyone, these retirement accounts are excellent options that are worth taking advantage of. 

Whether you’re employed in a government or nonprofit sector that offers 401(a) and possibly 457(b) or 403(b) or from the private sector with 401(k)s as your option, they are almost always worth participating in as much as makes financial sense to your overall plan and income level.

If you have the option, just get started! The earlier you invest, the better.