401a vs 401k: Key Differences You Need to Know for Retirement Planning

401(a) and 401(k) plans are employer sponsored retirement accounts designed to help employees save for retirement. Both plans offer tax benefits and allow employees to contribute pre-tax dollars to their accounts.

Brief History of 401(a) and 401(k) Plans

401(a) plans have actually been around since the 1950s, but they’ve grown in popularity during recent years as financially conscious workers look for ways to save for retirement. 401(a) plans are especially common with government agencies, educational institutions, and nonprofit organizations.

401(a) plans are a little less well-known than 401(k) plans, however. Today, the 401(k) is a common feature in an employee benefit package. The 401(k) was first introduced in 1978 as part of the Revenue Act. 401(k) plans are more common among private employers.

Eligibility and Participation for 401(a) and 401(k) Plans

Both 401(k) and 401(a) plans have similar eligibility requirements. Generally speaking, eligible employees are 21 years old or older. They also have a minimum of 1-2 years of employment with their employer to be eligible.

That said, each employer decides the exact terms and conditions for their retirement plan eligibility. Requirements can also vary depending on the specific plan the employer offers.

Employer Requirements for Offering 401(a) and 401(k) Plans

The IRS has rules for employers to follow when they set up 401(a) and (k) plans. For starters, they need to draft a written plan describing the terms and conditions of their employer sponsored retirement plan. Then, they need to designate a trust fund to hold the plan’s assets.

Record keeping for the plan is also essential. That way there’s a clear record of contributions, withdrawals, and so on. Employees also need to be informed about the plan’s details.

Contributions and Limits for 401(a) and 401(k) Plans

401(a) plans have a higher limit compared to 401(k) plans. For 2024, the total contribution limit for 401(a) plans was $69,000, while the limit for 401(k) plans was $23,000, with an additional $7,500 catch-up contribution allowed for employees aged 50 and older.

In 2025, the contribution limit for 401(k)s jumps to $23,500 while the 401(a) limit rises to $70,000. The catch-up limit for individuals over 50 has not changed.

These limits exist because in most cases, these contributions are pre-tax dollars; if there were no contribution limits, individuals might abuse the system to avoid or offset taxes too much.

Employer Contributions for 401(a) and 401(k) Plans

Employers that offer a 401(a) plan must make contributions to the plan; they’re mandatory. In contrast, employers that offer a 401(k) plan can choose whether or not they’ll make contributions to their employee’s plans.

401(k) matching is actually a common perk that some private companies include in their employee benefit package. For example, some employers match a small percentage (such as 4%) of their employees’ contributions to their 401(k)s. So if a particular employee contributed 8% of their paycheck to their 401(k), then the employer would also add the first 4% of that money as their own contribution.

Employee Contribution Requirements

Generally, employee contributions to a retirement plan are completely voluntary; employees can choose to participate or not. That said, some employers that offer 401(a) plans might require their employees to make a minimum contribution.

Vesting Schedules and Employer Matching

Employer contribution to a 401(a) or 401(k) plan might be subject to a vesting schedule, which determines when they employee actually “owns” the contribution the employer made. These schedules can vary depending on the employers’ terms and conditions. The retirement plan might also dictate a vesting schedule.

Tax Benefits for 401(a) and 401(k) Plans

When it comes to tax rules, both 401(a) and 401(k) plans offer significant tax benefits to employees. Contributions to these retirement savings plans are made with pre-tax dollars, meaning employees do not pay income taxes on the money they contribute. Instead, employees pay income taxes when they withdraw the money during retirement. In the meantime, the money invested in the fund grows tax-deferred.

For 401(a) plans, employer contributions are mandatory, and employees may also make voluntary contributions. The employer decides whether these contributions are made with pre-tax or after-tax dollars. If contributions are made with pre-tax dollars, employees will pay income taxes upon withdrawal. Conversely, if contributions are made with after-tax dollars, employees will not pay income taxes when they withdraw the funds.

In contrast, 401(k) plans feature voluntary employee contributions, with employers potentially offering matching contributions. Typically, contributions to 401(k) plans are made with pre-tax dollars, allowing employees to defer paying income taxes until retirement. Some employers also offer Roth 401(k) plans, which allow for after-tax contributions. With a Roth 401(k) plan, employees pay income taxes on their contributions upfront, but the money grows tax-free, and withdrawals during retirement are not subject to income taxes.

Additionally, employees who contribute to 401(a) or 401(k) plans may be eligible for a tax credit, designed to encourage low- and moderate-income employees to save for retirement. The amount of this tax credit depends on the employee’s adjusted gross income and the amount of their contributions to their retirement account.

Investment Options and Management for 401(k) and 401(a) Plans

The biggest advantage of these retirement plans is that they are also investment options; the money employees put in them grows over time. To do that, 401(k) and 401(a) plans offer a range of investment options, including stocks, bonds, and mutual funds. Exactly what options are available will depend on the plan the employer has set up, but employees can typically choose from a variety of investment options. Their choices are usually based on their retirement goals and their risk tolerance, like any investment account.

After the funds are invested, they need to be managed. Employers can hire a professional investment manager to oversee a plan’s investments. Robotically managed portfolios are also pretty common. Sometimes, employees might even choose to manage their own investments within the plan, controlling their own financial future with a hands-on approach.

One key feature that investors might not think of right away when they’re setting up a 401(a) or 401(k) plan is the associated fees. It’s very common for these plans to have some small fee associated with them, such as a small percentage every year or a flat fee. Both employees and employers should carefully review a plan’s fees and expenses before proceeding.

Taxation and Withdrawals

A 401(k) is considered to be a tax deferred retirement plan, and so is a 401(a), meaning you don’t owe taxes on the funds until you make a withdrawal. That’s why the IRS institutes strict rules governing withdrawals.

After the age of 59 1/2, you can withdraw funds from a 401(a) or 401(k) plan without penalty. Any withdrawals you make before that age could be subject to a penalty (10% additional tax at the time of this writing).

There are a few exceptions to this penalty in certain circumstances. For example, if an employee becomes permanently disabled, they can withdraw money without penalty. Another example is if an employee passes away, but they named someone as the account beneficiary; the account beneficiary wouldn’t be penalized for an early withdrawal.

Rollover Rules for 401(a) and 401(k) Plans

If an employee stops working for a company, they’re (understandably) no longer eligible for ongoing contributions to that particular retirement plan. But if they make this employment change before age 59 1/2, they don’t necessarily have to get penalized for withdrawing money early.

Instead, employees can “rollover” their retirement funds into another qualified retirement savings plan. As long as they complete this rollover within a set time period, there is no penalty.

Loans From 401(a) and 401(k) Plans

In some cases, employees can actually give themselves a loan from their 401(a) or 401(k) plan to help navigate unexpected expenses. That said, these loans can be subject to restrictions and penalties. These loans also usually need to be repaid with interest.

Pros and Cons of 401(a) and 401(k) Plans

There are advantages and disadvantages to every retirement savings plan, including 401(a) and 401(k) plans. These pros and cons are important to consider before deciding on any savings strategy.

Pros of 401(k) and 401(a) Plans

Both 401(k) and 401(a) plans offer tax benefits, and they allow employees to contribute pre-tax dollars to their accounts. These investment accounts can also be diversified and personalized to meet an employee’s personal retirement goals and risk tolerance.

For private sector employers, offering a 401(k) plan can be a big advantage. Competitive 401(k) matching can help employers attract and retain top talent. 401(k) plans can also provide benefits to employers and employees alike, too.

Cons of 401(k) and 401(a) Plans

There are drawbacks to these retirement plans, however. For starters, there are penalties for early withdrawals from these accounts; if you find yourself in a financial bind and need to withdraw funds, you’ll pay 10% extra in taxes.

Additionally, these plans may have administrative costs and fees associated with investment management. The money gained by investing should outweigh the cost, but it’s important to account for. And as with any investment option, a 401(k) or 401(a) has a certain amount of risk. Even though these funds statistically make money for their owners, here’s no guarantee that you’ll get a certain rate of return.

Finally, employers should be aware that they might be subject to certain reporting and disclosure requirements for their 401(k) or 401(a) plan.

Conclusion

Ultimately, 401(a) plans and 401(k) plans are pretty similar retirement savings options that have a few key differences. 401(a) plans are largely limited to government agencies, educational institutions, and nonprofit organizations while 401(k)s dominate the private sector. Because of that it’s pretty uncommon for an employee to have both a 401(k) and 401(a) plan.

But regardless of which plan their employer offers, employees can take advantage of their 401(a) or 401(k) to gain tax benefits and prepare for their financial future.

Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.