Both 401(a) and IRA retirement plans are generally funded with pre-tax and tax-deductible contributions, and the money grows on a tax-deferred basis. Withdrawals from these retirement plans are taxed at normal income-tax rates. However, there are several differences between the two plans. One main difference is 401(a) plans are employer-sponsored, while IRAs are purchased through financial companies.
401(a) and 401(k) plans are similar in name and purpose but are generally not offered by the same employers. While 401(k) plans are sponsored by different employers, 401(a) plans are primarily offered to public-service employees such as government officials and teachers. Employers sponsoring these plans control how they are funded. For example, some employers may make all the contributions or have the contributions made entirely by employees. Annual contribution limits for 401(a) plans are determined by the Internal Revenue Service. As of 2013, employees can contribute up to $51,000 annually to their 401(a) plans. Withdrawals after age 59 ½ are considered normal distributions with only regular income taxes levied against the amounts. Distributions before this age may cause the IRS to apply a 10-percent early-withdrawal penalty. A 20-percent federal withholding tax may be applied to withdrawals that employees keep which are eligible for rollover to other qualified plans such as IRAs.
IRAs are funded at the discretion of the owners who purchased them. They can make payments fitting their financial needs and put as much as they want up to the IRS’ annual contribution limit. As of 2013, IRA owners can contribute up to $5,500 per year if they’re under 50 years old and up to $6,500 if they’re 50 and over. Normal distributions from IRA plans occur when owners turn 59 ½ with only regular income taxes taken out. If funds are drawn early than 59 ½ and not for qualified reasons such as paying college tuition or purchasing first-time homes, a 10-percent early-withdrawal penalty will be assessed to the withdrawal amounts.
One of the advantages of 401(a) plans is that both employers and participants can contribute. Employers can match employees’ contributions up to a certain percentage at the employers’ discretion. Another advantage is employees can make after-tax contributions to their 401(a) plans as well. However, after-tax contributions are limited to 25 percent of their salaries. An advantage for IRAs is that owners can fully deduct their IRA contributions on their tax returns depending on their incomes, filing statuses and whether or not they’re contributing to 401(a) or other employer-sponsored plans.
A disadvantage for 401(a) plan participants is the employer’s contributions may not be fully vested into the plans when employees leave. Employees who leave get their own contributions but to get their employers’ contributions, they may be required to be employed for a certain period of time. If they leave before this time is met, they forfeit their employers’ contributions. A disadvantage for IRAs is you must start taking out distributions at age 70 ½ and cannot contribute to these plans after this age even if you’re still working.
- Retirement Plans Advisor: Online Guide to 401a Retirement Plans
- IRS: Governmental Plans under Internal Revenue Code Section 401(a)
- Retirement Plan Advisors: Public Sector - 401(a) Basic Information
- ICMARC: 401(a) Contributions
- IRS: Retirement Topics - IRA Contribution Limits
- PT Money: Traditional and Roth IRA Income Limits Raised Once Again for 2013
- Bankrate: IRS Rules for Early IRA Withdrawals
- IRS: Traditional IRAs
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