401a vs 401k – What is the difference?
In a world where getting a pension used to be the thing to work for and loyalty to a company was something that was expected from the employee, those things are now artifacts of the past. For us millennials, we are told that at the current rate of spending, social security will be gone by the the year 2035. Pensions as we know it are things that our parents and grandparents spoke of, and now we, as millennials are exiled the fend four ourselves. Enter, the 401a plan and the 401k plan.
The names are similar, and there are a ton of similarities. However, they are totally different and if you’re going to be in a lifelong career and make serious investments towards your future, you need to know the difference. Knowing the difference may even cause you to think about your career path itself.
By the end of this blog post, 401a vs 401k, you are going to comprehend the following:
-Why Am I Even Mentioning Pensions?
-What is a 401a plan, plus the advantages and disadvantages with the 401a?
-What is a 401k plan?
-What are the advantages and disadvantages with the 401k?
-How much should I invest in my 401a?
-How much should I invest in my 401k?
Why Am I Even Mentioning Pensions?
I am not able to talk fully talk about the subject matter at hand without mentioning pensions in the same breath.
“But why? This has nothing to do with 401k’s” You may say.
This may be useless for those who are not millennials, but for us, this is imperative to know. My parents grew up in a day where working for a company for 20+ years was the norm. After working all of those years and putting in back-breaking work for the company, they would then give you a nice little pension that continued to pay you after you retired. That doesn’t really exist anymore.
Since the days of the 08’ recession, things in the workforce have changed quite a bit. The employee has become more independent, and self reliant and less loyal to a company. After the recession, what was once a track to success (go to college, graduate, get a job, stay in that job for life and retire), is now an idea of the past. We have realized that we have sold ourselves short by allowing companies to dictate our future. We have given companies too much power and we have taken that power back.
In the perspectives of the employers after the recession, it has become apparent that the economy is not as stable as what everyone makes it, and they don’t have to be reliant upon the employees that they have. Also, due to the advancements in technology and the advent of the global economy (as opposed to only attracting business locally), companies no longer have to pay high dollars to people in high positions, because there may be outsourcing opportunities for cheaper labor in order to do the same job. Companies have also downsized and they try to get one person to do multiple things in their profession, as opposed to hiring one person for each job.
Now, I understand that I may come under fire from others reading this article about all of the things that I am saying, but I am speaking from the perspective as to why 401a plans and 401k plans have become massively attractive at this point in our workforce history. All employers are not bad. There are indeed some great companies out there. If there were not, you would not be looking to invest in an 401 option.
To conclude here about pensions, it is not something that the “average” millennial can bank on. Many companies do not offer pensions. That has become a thing of the past. Once one thing leaves, something else has to replace it. Thus, here walks in 401a and 401k. This enables the employee to create something that can move with them wherever they work, the employee will not lose their money in case a company goes under, and in many cases, it is accessible in case it needs to be touched for some reason.
Now that I’ve taken you to school about pensions, are you ready to get into the nitty gritty about the difference between a 401a and a 401k? Lets go!
What is a 401a?
The 401a plan is very similar to the 401k. It is offered by the employer for the employee to invest in for the duration of his or her employment. You may have already known that piece of it, but what you may not have known is that this is an investment/retirement plan offered typically offered by governmental and NGOs (non-governmental organizations), as well as non-profit organizations. Since this is considered a different sector in the workforce, the rules of investing are slightly different in comparison to a 401k.
401a plans are not managed by employees, which means that the power rests in the hands in the employer. In many cases, the 401a retirement plan is mandatory for employees to be enrolled in.
The Pros And cons of A 401a
The main thing that I want you to notice here is that this may be a mandatory thing to participate with your employer. This isn’t always the case, but the chances are high that you may encounter this if your company that you’re working for offers the 401a. This is great from one perspective because you are automatically enrolled, and a small portion of your money is being allocated to your retirement fund.
From a different perspective, there are some individuals who would rather prefer the option of their hard-earned money going into a retirement plan, or having that money go into their bank account instead. This also means that you may not have the chance of choosing the type of holdings that will go inside of your retirement portfolio. The employer will have full authority as to what you choose to invest in. In some cases, the employer offers certain incentives with the 401a to the employee. Though your ability in choice may be limited, this is still a great option for you in the long run if this is what you have to choose from.
What is a 401k?
A 401k is a retirement plan that is offered by the employer, in the private sector of the workforce. Not all companies in the private sector offer the 401k option, but many established companies do. If this is offered, the employee has the choice of opting into the retirement plan. At this point and time, the employee may have a list of different types of holdings that they can choose from, and invest into their portfolio from there. I will revisit this point here, shortly.
Contributions made to this retirement account is what is considered to be tax-advataged, or in other words, pre-tax contributions. That’s a lot of terminologies thrown around if you’ve never dealt with this before. Let’s break this down a little bit…
When you get your pat check from your job, you have the gross amount (the money you’ve earned before Uncle Sam takes his money from your pay-check), and then you have the net amount that you’ve made at your job (the money that you have left over after Uncle Sam took his said a=share of the money from your pay-check). The 401k option allows you to invest money from the GROSS amount BEOFRE Uncle Sam can get his stingy little fingers on your money.
Speaking of contributions, some companies may match the employee contribution to a certain percent. For example, if Bob’s Doughnut Shop offers a 401k and they tell you that they “match up to 3%”, and you say you want to max that out, all you’re saying is that you want to invest 3% of your paycheck into your retirement account. Let’s say you make $100,000 per year. 3% of $100,000 is $300. Bob’s Doughnut Shop will “match” that number of $300, making your total contribution into the retirement fund, $600! It’s FREE MONEY!
But you don’t have to stop there. Maybe you can invest 10% ($1,000 based on a $100,000 income) of your paychek into your 401k. Bob’s Doughnut Shop will still match up to 3%, but they will not match anything else. In this scenario, you will still get the $600 from the 3% given from the company. However, on top of that, the reminder of will also be placed in the 401k. Your total contribution will now be at $1,300. WOW! I love these numbers.
The 401k is At the time of writing this article in the year of 2021, the max contribution is $19,500. You will not be able to go beyond that since this is a rule in place by the American government here in the US. This is because you they allow you to not be taxed on your total contributions until it is time for you to take it out.
The Pros And Cons Of 401k
Believe it or not, there are pros and cons to the 401k. Some people choose to not invest in their own future! For some this is by choice, and for others, they may not even know that they have this choice. Whichever side that you’re on, choosing not to take advantage of this retirement account once given the option to do so, and not doing it, can be one of the silliest moves that one can make.
Since you also have the option of choosing your type of holdings that will go inside of the 401k, certain index funds and stocks may outperform the other. To truly maximize on your investment with this account, you really have to do your homework and research what is best. If you’re not an expert in this field, that’s ok. Most of the time, the employer will have stocks in the form of index funds that you can choose from, and you typically cannot lose with those options. I wrote a few articles on index funds, how to invest in them, and everything else that you need to know about them, so if you haven’t checked it out, I advise you to familiarize yourself with it. It will answer a ton of your questions.
Conclusion
I called my blog, 401k Minority Millionaire for a reason. As a black male in America, we are considered to be a minority in the United States. Most minoirities who have grown up here in the United States were not exposed to the same information as many who considered themselves to be Caucasian (white). I know what a 401k is because my dad started to read money-magazines at a much older age in his life, and he began to share a lot of the information with me, as I was a young entrepreneur who cut grass in the neighborhood with my push-lawnmower.
My dad first showed me a graph with investments in an IRA Roth fund. This peaked my interested. I would later find out about a 401k portfolio in my late 20s, and now I’m glad that I was able to get started.
A lot of my friends and relatives…NOT so lucky. I explain this to many of my friends who are minorities in theor 30s and 40s, and they feele like they’ve been lied to all of their lives because no one has told them about these types of options.
Whether you are a minority or not, and you’re reading my article, first I want to say thank you for reading. Secondly, check to see if your job offers a 401k or a 401a. Chances are that you’re reading this because you have found out that your employer does offer one of these plans, but you need to know which is best. Use the information I laid out before you and make an educated decision for what’s best for you. With that said, please note that there is not a WRONG option here.
Choose something, begin to invest as much as you can, and don’t touch it as you begin to put more and more into it. You will be amazed at how far a little bit every single month will go. Your future self will appreciate the decision you made to invest in yourself in the present. Don’t be nervous about your decisions, because you can always make changes.
Unlike the pensions, you can rollover your 401k and 401a with you to other places of employment. In some ways, it’s a traveling pension. It will go wherever you want it to go. Be self reliant with your future. You don’t have to worry about the company that you’re working for, folding in, and then losing all of your investments. This is about being financially independent, and have a ton of money to live off when ever you decided to quit work.