Unless you work for a government entity or a non-profit organization, you may have never even heard of a 401(a) plan. These plans are similar to 401(k) plans in some aspects, although there are a few significant differences.
The 401(a) can be a great way to save for retirement, so how do they work? We will tell you everything you need to know about these retirement savings plans to decide whether one might be right for you.
Keep reading to learn how these plans work, including details about tax benefits, contribution limits, withdrawals, etc.
What Is A 401(a) Plan?
So, what is a 401(a)? A 401(a) plan is an employer-sponsored retirement plan that allows contributions from the employee and employer. These contributions may be a specific dollar amount or a percentage of the employee’s salary.
Like 403(b) plans, 401(a) plans are typically available to employees of government agencies and nonprofits, including teachers, administrators, and staff of public schools and universities.
- The plan is usually not available to employees in the private sector.
Employers often establish these plans to incentivize employees to stay on the job, similar to a profit-sharing plan.
Under this type of plan, the employer strictly manages employee contributions. The employer decides whether the contributions are made on a tax-deferred, pre-tax, or after-tax basis. Contributions may be either mandatory or voluntary, as determined by the employer.
Similarly, employer contributions are set at a fixed dollar amount or a matching percentage of the employee’s contribution.
- Typically, a 401(a) plan offers somewhat limited investment options. The employer usually only allows investments in the most stable and secure funds.
This includes bonds, annuity contracts, and some mutual funds. The plan usually prohibits investment in stocks, real estate, gold, silver, or other risky areas.
When it comes time to withdraw your money, the same early withdrawal penalty that applies to most other retirement accounts will apply.
- If you withdraw your money before age 59 1/2, the IRS will impose a 10% tax penalty on those funds.
However, you can roll over your money to an IRA, 401(k), Roth account, or other qualified retirement plan without a penalty. The IRS does not allow simultaneous participation in a 401k and 401a, although you can contribute to a 401a and IRA simultaneously.
KEY TAKEAWAYS
- A 401(a) retirement plan is similar to your typical 401(k) plan; however, it usually is only available to employees of government agencies and nonprofits.
- Typically, investment options are somewhat limited with a 401(a) plan. The employer usually prohibits investing in stocks, real estate, or gold.
- The employer decides if employee contributions to a 401(a) account are mandatory or voluntary.
401(a) Plan Contribution Limits For 2024
Contribution rules for 401(a) plans can sometimes be confusing. They are not as straightforward as those for 401(k) or IRA plans.
First, your employer decides whether your contributions are mandatory or voluntary. Most of the time, the contributions are required.
Employer contributions to the account are always mandatory. The employer may contribute a fixed dollar amount, a matching percentage of employee contributions, or a matching contribution within a specific dollar range.
In 2024, contributions to a 401(a) can be up to $69,000. The annual limit does not distinguish between employee contributions and employer contributions.
Either or both parties may contribute to the combined total limit. However, there are no catch-up contribution provisions for a 401(a) plan. Regardless of age, the annual contribution limit is genuinely the limit.
You cannot make additional contributions to your account during that calendar year.
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Withdrawal Rules For 401(a) Retirement Plans
The withdrawal rules for a 401(a) are fairly standard. The IRS has particular early distribution rules that must be followed.
If you withdraw funds from the account before age 59 1/2, you will incur the 10% additional tax penalty.
If you withdraw pre-tax contributions, you will pay regular income taxes on the money you withdraw. For Roth accounts, your withdrawals will be tax-free.
You can roll your funds into another qualified retirement plan without penalty if you leave your employer. You can roll the funds into a 401k, IRA, or Roth account penalty-free.
You should also be aware of your employer’s vesting schedule. You may not be entitled to the total balance in your account until you reach a certain number of years of service with the organization.
You may be fully vested in your voluntary contributions from Day 1, but you might not be vested in the employer matching funds until later in your employment.
TIP
If you work for a government agency or nonprofit, a 401(a) plan can be a great retirement vehicle. The employer must contribute a fixed dollar amount, a matching percentage, or a matching contribution with a specific dollar range.
401(a) VS 401(k): Which Is Better?
Regarding 401(a) vs 401(k), eligible employees with access to both plans must choose between the two. The Internal Revenue Code does not allow for participation in both plans at the same time.
You may, however, participate in a 401(a) plan, a 457 deferred compensation plan, and an IRA.
The 401(a) and 401(k) are defined contribution plans. Plan participants make deposits into their accounts, and those investments can grow tax-free until reaching retirement age. 401(k) contributions are almost always voluntary, although 401(a) contributions are often mandatory.
Your employer establishes these mandatory contributions; they are also required to make contributions on your behalf.
- Voluntary contributions to your account are usually capped at 25% of your annual pay or gross income from your employer up to $69,000. However, your employee portion of your 401(k) contributions is capped at $23,000 (or 100% of the employee’s compensation) annually.
- The investment choices associated with a 401(a) are much more limited than a 401(k).
Regarding withdrawals, you can roll over both accounts by taking a lump sum rollover into a traditional IRA, Roth IRA, or another 401(k). Minimum distributions kick in when you reach age 73 with both plans, so there are no significant differences.
Your decision might ultimately depend on which plan is available to you, but you should always consult a financial professional for your retirement planning.
The Bottom Line
A 401(a) plan is not extremely common and is usually only available to employees of educational institutions and non-profit employees.
These can be a great way to save for retirement, although the eligibility requirements and other rules sometimes differ slightly from those of more common counterparts, like a 401(k).
You can receive tax credits on your contribution amounts in the current year and let your investments grow tax-free. If this type of plan is available, it can be a great way to begin saving for retirement.
Frequently Asked Questions
If you remove funds from your account before age 59 1/2, you will pay a 10% penalty on the money you withdraw.
You may, however, roll those funds over into another qualified account without paying the penalty. Upon retirement age, you can cash out your plan without paying the tax penalty.
A 401a is taxed much like most other retirement accounts. You generally contribute funds on a pre-tax basis and pay regular income taxes upon withdrawal.
Roth options are also available that allow for after-tax contributions and tax-free withdrawals.
You generally have a couple of options when you quit your job. First, you can leave your plan in place and not make additional contributions to the account. The investments continue to grow until retirement.
Alternatively, you can rollover the account into an IRA or 401k with another company.
You might be able to withdraw the funds, but be aware of the penalty you will likely incur. The amount available to withdraw will depend on your employer’s specific vesting schedule.
Voluntary contributions are usually capped at 25% of your annual salary. The combined employee and employer contributions can reach up to $69,000 annually in your account.
There are only a few differences between a 401(a) and a 401(k). The main difference lies in the types of employers who sponsor the plan.
There are also differences regarding annual contribution limits and mandatory contributions. The tax treatment and early withdrawal rules are essentially the same.
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