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401(a) Plan: What Is It? | Comprehensive Guide Inside

401a Plan Retirement Concept

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 major differences. The 401(a) can be a great way to save for retirement, so exactly how do they work? We will tell you everything that you need to know about these retirement savings plans so that you can decide whether one might be right for you. Keep reading to learn how these plans work including details about tax benefits, contribution limits, withdrawals, and more.

What Is A 401(a) Plan?

So, what is a 401a? A 401a plan is an employer-sponsored retirement plan that allows contributions from both the employee and employer. These contributions may be a specific dollar amount or a percentage of the employee’s salary. Like 403b plans, these plans are typically available to employees of government agencies and employees of nonprofits. This includes teachers, administrators, and staff of public schools and universities. The 401a plan is usually not available to employees in the private sector. Often, employers will establish these plans to incentivize employees to stay on the job, similar to a profit sharing plan.

Employee contributions are strictly managed by the employer under this type of plan. The employer decides whether the contributions are made on a tax-deferred, pre-tax basis or after-tax basis. Contributions may be either mandatory or voluntary as decided by the employer. Similarly, employer contributions are set at either a fixed dollar amount or a matching percentage of the employee’s contribution.

Typically, the investment options are somewhat limited with a 401a plan. The employer typically only allows for investments in the most stable and secure funds. This includes bonds, annuity contracts, and some mutual funds. Investment in stocks, real estate, gold and silver, or other risky areas is usually prohibited under the plan.

When it comes time to withdraw your money, the same early withdrawal penalty that is applicable to most other retirement accounts will apply. If you withdraw your money before age 59 1/2, then the IRS will impose a 10% tax penalty on those funds. However, you are allowed to rollover 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 both a 401k and 401a, although you can contribute to a 401a and IRA at the same time.


401(a) Plan Contribution Limits For 2021

Contribution rules for 401a plans can sometimes be a little confusing. They are not quite as straightforward as the rules for a 401k or IRA. First, your employer decides whether your contributions are mandatory or voluntary. Most of the time, the contributions are mandatory. Employer contributions into the account are always mandatory. The employer may decide to contribute a fixed dollar amount, a matching percentage of employee contributions or a matching contribution within a specific dollar range.

In 2021, contributions into a 401a can be up to $58,000. There is no distinction between employee’s contributions and employer’s contributions when it comes to the annual limit. Either or both parties may contribute to the combined total limit. However, there are no catch up contribution provisions for a 401a plan. Regardless of age, the annual contribution limit is truly the limit. You are not allowed to make additional contributions to your account during that calendar year.


Withdrawal Rules For 401(a) Retirement Plans

The withdrawal rules for a 401a are fairly standard. The IRS has very specific early distribution rules that must be followed. If you withdraw funds from the account before reaching age 59 1/2, then you will incur the 10% additional tax penalty. If you are withdrawing pre-tax contributions, then you will pay regular income taxes on the money that you withdraw. For Roth accounts, your withdrawals will be tax-free.

If you leave your employer, you are allowed to roll your funds over into another qualified retirement plan without penalty. You can roll the funds into a 401k, IRA, or Roth account penalty-free. You should also be aware of the vesting schedule that is established by your employer. You may not be entitled to the full balance in your account until reaching a certain number of years of service with the organization. You may be fully vested from Day 1 in your voluntary contributions, but you might not be vested in the employer matching funds until later in your employment.


401(a) VS 401(k): Which Is Better?

When it comes to a 401a vs 401k, eligible employees who have access to both plans will have to 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 both a 401a plan and a 457 deferred compensation plan as well as an IRA. Both the 401a and 401k are defined contribution plans. Plan participants make deposits into their accounts, and those investments can grow tax-free until reaching retirement age. 401k contributions are almost always voluntary, although 401a contributions are often mandatory. These mandatory contributions are established by your employer, and your employer is always required to make mandatory contributions as well.

Voluntary contributions into your account are usually capped at 25% of your annual pay or gross income from your employer. Your 401k contributions are capped at $19,500 per year, while your total contribution to a 401a can go all the way to $58,000.

The investment choices associated with a 401a are much more limited than with a 401k. When it comes to withdrawals, you can roll over both types of accounts by taking a lump sum rollover into a traditional IRA, Roth IRA, or another 401k. Minimum distributions kick in when you reach age 72 with both plans, so there are no major differences there. Your decision might ultimately lie in which plan is available to you, but you should always consult a financial professional for your retirement planning.


The Bottom Line

A 401a 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 are sometimes a little different than their more common counterparts like a 401k. 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 to you, then it can be a great way to begin saving for retirement.


Frequently Asked Questions

Can I cash out my 401a?

If you remove funds from your account before reaching age 59 1/2, then 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 reaching retirement age, then you can cash out your plan without paying the tax penalty.


What happens to my 401a if I quit my job?

You generally have a couple of options when you quit your job. First, you can leave your plan in place and simply not make any additional contributions to the account. The investments continue to grow until retirement. Alternatively, you might choose to rollover the account into an IRA or 401k with another company. You might have the option to withdraw the funds, but be aware of the penalty that you will likely incur. The amount available to withdraw will depend on your employer’s specific vesting schedule.


How is a 401a taxed?

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.


What is the maximum amount I can contribute to my 401a account?

Voluntary contributions are usually capped at 25% of your annual salary. Employee and employer contributions combined can reach up to $58,000 per year into your account.


What is the difference between a 401k and 401a?

When comparing a 401a vs 401k, there are only a few differences. The main difference lies in the types of employers who sponsor the plan. There are also differences when it comes to annual contribution limits and mandatory contributions. The tax treatment and early withdrawal rules are essentially the same.