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Types of Retirement Accounts: 401(a) vs. 401(k)
401(a) and 401(k) plans are both employer-sponsored retirement savings plans that offer tax benefits. However, there are some key differences between the two plans.
Contribution Limits
One of the most important differences between 401(a) and 401(k) plans is the contribution limits. For 2023, the contribution limit for 401(a) plans is $66,000 (or $73,500 for those age 50 or older). The contribution limit for 401(k) plans is $22,500 (or $30,000 for those age 50 or older).
- 401(a) plans: The employer determines the contribution limit.
- 401(k) plans: The employee elects to contribute a percentage of their salary, up to the contribution limit.
| Plan Type | Contribution Limit (2023) |
|---|---|
| 401(a) | $66,000 ($73,500 for those age 50 or older) |
| 401(k) | $22,500 ($30,000 for those age 50 or older) |
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Similarities of 401a and 401k
- Both are tax-advantaged retirement savings plans offered by employers.
- Contributions are made on a pre-tax basis, which reduces current taxable income.
- Earnings grow tax-deferred until withdrawn in retirement.
- Withdrawals are taxed as ordinary income.
- Both plans have annual contribution limits.
Differences between 401a and 401k
| 401a | 401k |
|---|---|
| Governmental plans | Private sector plans |
| Generally offer Roth contributions | Usually do not offer Roth contributions |
| Do not allow employee loans | May allow employee loans |
| Higher contribution limits for catch-up contributions | Lower contribution limits for catch-up contributions |
Retirement Age Differences
The required minimum distribution age is 72 for both 401a and 401k plans. However, there are some exceptions to this rule. For example, if you are still working at age 72, you may not be required to take distributions from your 401k plan.
## 401a vs. 401k: What’s the Difference?
401a and 401k plans are both retirement savings plans offered by employers. However, there are some key differences between the two plans.
### ERISA Fiduciary Standards
One of the biggest differences between 401a and 401k plans is the level of fiduciary responsibility that employers have. Under ERISA, employers are considered fiduciaries with respect to their 401k plans. This means that they have a legal duty to act in the best interests of plan participants and beneficiaries.
Employers do not have the same level of fiduciary responsibility with respect to their 401a plans. This is because 401a plans are considered “governmental plans” under ERISA. As a result, employers are only required to act in a “prudent” manner with respect to their 401a plans.
### Other Differences
In addition to the different fiduciary standards, there are a few other key differences between 401a and 401k plans:
* **Eligibility:** 401a plans are only available to employees of state and local governments. 401k plans are available to employees of both public and private sector employers.
* **Contributions:** 401a plans allow employees to make pre-tax contributions. 401k plans allow employees to make both pre-tax and after-tax contributions.
* **Investment options:** 401a plans typically offer a limited number of investment options. 401k plans typically offer a wider range of investment options.
* **Withdrawal rules:** 401a plans have more restrictive withdrawal rules than 401k plans. For example, employees who withdraw money from a 401a plan before they reach age 59½ will be subject to a 10% early withdrawal penalty.
## Comparison Table
The following table summarizes the key differences between 401a and 401k plans:
| Feature | 401a Plan | 401k Plan |
|—|—|—|
| ERISA Fiduciary Standards | Prudent man standard | Prudent fiduciary standard |
| Eligibility | State and local government employees only | Public and private sector employees |
| Contributions | Pre-tax only | Pre-tax and after-tax |
| Investment options | Limited | Wide range |
| Withdrawal rules | Restrictive | More flexible |
Alright folks, that’s the scoop on 401(a)s and 401(k)s. Hopefully, you’ve got a better understanding of these two retirement savings options now. Remember, it’s always a good idea to consult with a financial advisor or do some more digging online if you have specific questions about your own financial situation. Thanks for reading, and be sure to swing by again for more financial knowledge bombs in the future!