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401(a) Plan: What You Need to Know About It

Last updated 03/21/2024 by

SuperMoney Team

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A 401(a) plan is a type of retirement plan offered by certain employers, such as government entities and non-profit organizations. It’s similar to a 401(k) plan but with some key differences, including that the employer typically contributes more to the plan than the employee.
When it comes to saving for retirement, there are a lot of options to choose from. One of the most popular plans offered by certain employers is the 401(a) plan.
If you need to get more familiar with this plan, don’t worry. In this article, we’ll break down what a 401(a) plan is, how much you can contribute, and the withdrawal rules.

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What is a 401(a) plan?

A 401(a) plan is a defined contribution plan typically offered by employers in the public sector, such as government agencies or educational institutions. It’s similar to a 401(k) plan in the private sector, but there are some differences in the rules and regulations.
For instance, unlike an optional 401(k), employers can make a 401(a) plan mandatory for employees.

Contribution limits

The contribution limits for a 401(a) plan vary depending on the plan’s terms and the employee’s salary. In general, the employer can contribute up to 25% of an employee’s salary to the plan, up to a certain maximum amount.
The employee may also be able to make contributions to the plan using pre- or after-tax dollars, although the limits on these contributions will also depend on the plan’s terms. As of 2022, employees could contribute up to $19,500 to their plans. If the employee was over 50, they could contribute an additional $6,500 to the plan.

Withdrawal rules

Withdrawals from a 401(a) plan are subject to different rules depending on the type of distribution. If you withdraw money from your 401(a) plan before age 59½, you may be subject to a 10% early withdrawal penalty. That said, you must start to make withdrawals by the time you’re 70½ (also known as required minimum distributions, or RMD).
Additionally, the distribution may be subject to income tax. However, there are some exceptions to this rule, such as for certain medical expenses or for purchasing a first home.
If you leave your employer, you may have the option to roll over your 401(a) plan into another qualified retirement plan or an individual retirement account (IRA). This can be a good way to continue saving for retirement and avoid penalties and taxes.

Advantages and disadvantages of 401(a) plans

While 401(a) plans offer several benefits to retirees, there are also some disadvantages to keep in mind before getting one. Make sure you evaluate the specific features and rules of a 401(a) plan to determine whether it’s the best option for your retirement savings goals.
Here is a list of the benefits and drawbacks to consider.
  • Employer contributions. 401(a) plans are typically funded by both the employee and employer. Employers often contribute a fixed percentage of the employee’s salary to the plan, which can help increase the amount of retirement savings.
  • Tax benefits. Contributions made to a 401(a) plan can be made on a pre-tax basis, meaning they’re deducted from the employee’s income before taxes are taken out. This can lower the employee’s taxable income, potentially resulting in a lower tax bill.
  • Retirement savings. 401(a) plans can provide employees with a valuable source of retirement savings, allowing them to accumulate wealth over time.
  • Limited flexibility. 401(a) plans are often restrictive in terms of investment options, with employers choosing the investment options available to employees. This lack of flexibility can limit the employee’s ability to customize their investment portfolio.
  • Vesting schedules. Many 401(a) plans require employees to work for a certain period of time before they’re fully vested in the employer’s contributions to the plan. This means that if an employee leaves their job before the vesting period is over, they may not be able to take full advantage of the employer contributions.
  • Withdrawal restrictions. Withdrawals from 401(a) plans before the age of 59½ may be subject to penalties and taxes, making it difficult for employees to access their retirement savings if they need it earlier.

How to choose a 401(a) plan

Choosing the right 401(a) plan is an important decision for employees. Some key factors to consider when evaluating different plans include the fees, investment options, employer contributions, and any potential restrictions or limitations. Employees should also consider their own retirement savings goals and financial situation when choosing a 401(a) plan. Working with a financial advisor or retirement planner can also be helpful in making this decision.
A 401(a) plan can be a valuable tool in retirement savings, especially if you work in the public sector. By understanding the contribution limits and withdrawal rules, you can make informed decisions about managing your retirement savings. Be sure to talk to your employer or a financial or investment advisor for more information about your 401(a) plan.

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Can I withdraw money from my 401(a) plan before retirement?

In general, you cannot withdraw money from a 401(a) plan before retirement without incurring penalties. However, there are some exceptions to this rule, such as if you experience financial hardship or become permanently disabled.

Are there any tax benefits to contributing to a 401(a) plan?

Yes, there are several tax benefits to contributing to a 401(a) plan. First, any contributions you make to the plan are typically tax-deductible. Additionally, the money in the plan grows tax-free until you withdraw it in retirement. At this time, if you contributed pre-tax dollars, you’ll have to pay taxes on those funds.

What happens to my 401(a) plan when I leave my job?

If you leave your job and have a 401(a) plan, you may have several options for what to do with the plan. You may be able to leave the money in the plan, roll it over into a new retirement plan, or withdraw it and pay taxes and penalties. The specific options available to you will depend on the terms of your plan and your individual circumstances.

Key Takeaways

  • 401(a) plans are retirement savings plans sponsored by public sector employers.
  • The contribution limit for employees in 2022 was $19,500, with an additional $6,500 catch-up contribution for those over 50.
  • Employers may also contribute to the plan on behalf of employees.
  • Withdrawals before age 59½ are subject to a 10% penalty, with some exceptions. However, you must start to withdraw from your plan by the age of 70½.
  • Employees should carefully evaluate the features and rules of different 401(a) plans before choosing one.
  • Working with a financial advisor or retirement planner can be helpful in choosing a 401(a) plan.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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