The Differences Between a 401(k) and a 401(a)

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There is no question that there are many different investment vehicles for you to choose from in this day and age. Two of the most popular options would have to be the 401 (k) and the 401 (a) retirement accounts. Both of these options have several advantages and disadvantages, and it is definitely worth it to fully investigate these options. When it comes to these two choices, here is some important information:

What is a 401(k)?

A 401(K) is much different than a traditional pension.

Of course, employees have had many different types of pension plans over the years. However, there is a big difference between the traditional employee pension and the newer 401(k). First of all, a 401(k) is known as a defined-contribution plan. Both the employee and the employer can make contributions to this account. Of course, there are some dollar limits set up by the IRS that both the employee and the employer must abide by. On the other hand, a traditional pension plan is known as a “defined-benefit plan” simply because it is the employer's responsibility to provide a certain amount of money to the employee after they retire.

The 401(k) does have contribution limits.

Like mentioned previously, a 401(k) will always have contribution limits. In general, the limits for workers under 50 can be as high as $19,500 per year. For employees over 50, the contribution limit is extended to as high as $26,000 because a $6,500 catch-up allowance is added to the total. Of course, if an employee also contributes to this, then the limit will be increased to $58,000 for those under 50 and $64,500 for those over 50.

What happens when you leave your job?

Life is about changing, and that is definitely true when it comes to employment as well. Of course, this begs the question, just what happens to your 401(k) if you leave your job? Well, in that case, you have four different options that you could consider:

First of all, you could withdraw the money. However, this isn't necessarily a good idea unless you need the money for a pressing bill, such as some kind of a medical expense. The money that you can incur from your early withdrawal will immediately be taxable, and you might also be hit with a 10% early distribution tax or you are totally and permanently disabled. Of course, in these days of the COVID-19 pandemic, Uncle Sam has generously suspended this rule for the time being.

Second, you might have the option of rolling your 401(k) over into an IRA. However, this has to be done carefully, or you might run afoul of the IRS and get hit with heavy penalties.

You also have the option of leaving it with the old employer, where it will simply be sitting stagnant. However, this only works with accounts that are valued at $5,000 or higher. Accounts that are less valuable will generally have to be moved in some way.

Finally, there are some cases where the 401(k) could be moved to the new employer. This is often a great way to maintain the tax-deferred status of the 401(k), and it is often much easier than attempting to roll it into an IRA.

What is a 401(a)?

A 401(a) plan is a bit different from a 401(k) plan in that it is usually seen in a government or non-profit organization. Additionally, this plan is generally an employer-sponsored retirement plan that will allow both the employer and the employee to contribute to it. A 401 (a) plan is usually popular with employers because they have much more control over how the plan is invested.

Employees can still withdraw funds from these accounts.

One of the great things about the 401(a) account is that it still gives employers some leeway on what they can do with the account. First of all, an employee can usually withdraw these funds and have them rolled over into a qualified retirement plan, receive a lump sum from the 401(a), or place them in an annuity.

Investments in 401(a) plans are generally low-risk.

The investments in a 401(a) usually do not carry a large amount of risk. They would typically include funds that are focused on value-based stocks and many different investments in government bonds.

Differences Between a 401(k) Plan and a 401(a) Plan

Investments in 401(a) plans are generally low-risk.

The investments in a 401(a) usually do not carry a large amount of risk. They would typically include funds that are focused on value-based stocks and many different investments in government bonds.

Differences Between a 401(k) Plan and a 401(a) Plan

According to the experts at SoFi invest, “…the 401a contribution limits are much higher than the limits at a 401(k).” However, that isn't the only difference between the two. In many cases, participation in a 401(a) plan is mandatory, whereas participation in a 401(k) plan is only a voluntary act. Moreover, another difference between the two would be that the contributions of a 401(a) plan are determined by the employer, whereas in a 401(k) the participants have more options.

Either way, it is important to fully understand the differences between the two so that your financial future remains intact. This will allow you to have a comfortable retirement, and that is what it's all about!

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Samantha Acuna is a writer based in San Francisco, CA. Her work has been featured in The Huffington Post, Entrepreneur.com, and Yahoo Small Business.