What Is a 401(a)?
A 401(a) is a retirement savings plan offered by government agencies, educational institutions, and nonprofit organizations rather than private corporations.
These plans can be tailored to fit the needs of the employees and encourage them to stay with the organization they are working for.
The employer has control over the contributions made by the employee. The employers are required to contribute to the plan.
Employee participation is likewise typically mandatory. Contributions can either be pre-tax or post-tax.
When the employee leaves the organization, he can withdraw the funds or roll them over to another qualified retirement savings plan. Purchasing an annuity is also another option.
What Is a 401(k)?
A 401(k) plan is one of the most popular employer-sponsored retirement savings plans. A defined contribution plan allows employees to save and invest for their future.
Under a 401(k) plan, employees can contribute a portion of their paycheck to their accounts. The money is then invested and grows over time. When the employee retires, they can use the money to supplement their income.
Private corporations offer 401(k) plans. Employee participation is voluntary, but employers may offer matching contributions as an incentive for employees to participate. There are even sustainable 401(k) portfolios that enable employees to invest in climate-friendly funds.
Differences Between a 401(a) and 401(k)
There are several key differences between 401(a) and 401(k) plans:
Employee Eligibility
The Internal Revenue Code specifies that an individual should reach at least 21 years old or complete a particular tenure with their employer to be eligible for a 401(a) or a 401(k).
Employees working for a nonprofit organization or the government will likely have a 401(a) plan as retirement savings. In contrast, those who work for a for-profit company are likely to have a 401(k).
Contribution Limit
The contribution limit for a 401(a) plan for 2022 is $61,000. This amount constitutes both employee and employer contributions. It increases to $66,000 for 2023.
The contribution limit for a 401(k) is set at $20,500 for 2022. A catch-up contribution of $6,500 is allowed for employees aged 50 and above, raising the contribution limit to $27,000. In 2023, the limits increase to $22,500, with a catch-up contribution of $6,500, for those aged 50 and above.
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401(a) and 401(k) Contributions
Contributions to 401(a) can be either mandatory or voluntary. 401(a) plans are made to tailor the plan holders' needs and encourage them to stay with the organization they are working for.
The employer decides whether contributions be made with pre-tax or post-tax money. Employers also are in charge of requiring whether their employees should contribute or not.
The employer match requirement allows employers to contribute in either one of three manners - dollar-for-dollar, matching a specific percentage, or paying a particular amount.
On the other hand, traditional 401(k) contributions are voluntary. Employees can decide how much they want to contribute from their paychecks. Their employer might match their contribution, but it is not required.
Download the 401(k) Plan Comparison Tool.
401(a) and 401(k) Taxes
401(a) and 401(k) plans have the same taxes in terms of contributions. Like a traditional 401(k), 401(a) plan contributions are made with pre-tax dollars.
This means that the employee's contribution is not subject to income taxes. The money grows tax-deferred, and the distributions during retirement are taxed as ordinary income.
Additionally, if withdrawals for both accounts are made before reaching the age of 59 1/2, the IRS imposes a 10% early withdrawal penalty on top of regular income tax.
Finally, the saver's credit is a bonus that employees get when they voluntarily contribute to their 401(a) or 401(k) or any other IRS-qualified retirement plan.
Employees aged 18 or older, not claimed as a dependent on another person's return, and not a student is qualified to claim the credit.
The tax credit amount will depend on the employee's adjusted gross income. This can be 50, 20, or 10% of their contributions up to $2,000.
The Bottom Line
401(a) and 401(k) plans are both employer-sponsored retirement savings plans. The key difference between the two is that 401(a) plans are typically offered by nonprofit organizations and the government, while private corporations offer 401(k) plans.
Both types of accounts have contribution limits and offer tax breaks for employees. Withdrawals from both types of accounts may be subject to an early withdrawal penalty if taken before the age of 59 1/2.
Tax credits are available for those who make contributions to their 401(a) or 401(k) as long as they qualify for the eligibility set by the IRS.
FAQs
1. How do employers benefit from matching contributions to their employees' retirement accounts?
Matching contributions from employers help employees save for retirement while also providing employers with tax breaks. Employers receive a tax deduction for their contributions to their employees' 401(k) or 401(a) accounts.
2. What is the saver's credit?
The saver's credit is a tax credit available to employees who voluntarily contribute to their 401(a) or 401(k) accounts. To qualify for the credit, employees must be age 18 or older, not claimed as a dependent on another person's return, and not a student. The amount of the credit will depend on the employee's adjusted gross income.
3. What is the purpose of the saver's credit?
The saver's credit is designed to encourage employees to save for retirement. The credit can reduce the amount of taxes that employees owe and may even increase their refund.
4. What other retirement savings plans can qualify for saver's credit?
In addition to 401(a) and 401(k) plans, other IRS-qualified retirement savings plans can qualify for the saver's credit. These include 403(b) accounts, 457 plans, and traditional and Roth IRA accounts.
5. What is a better mode of contribution, pre-tax or post-tax?
Pre-tax contribution is ideal when an employee is in a lower tax bracket and expects to be in a higher tax bracket during retirement. A post-tax contribution may be ideal when an employee is in a higher tax bracket and expect their taxes to stay the same during retirement.
