What Are 401(a) Plans?

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

What is a 401(a) Plan: Definition and Overview

401(a) plans are a type of retirement savings plan primarily used by government and nonprofit employers. Unlike the more commonly known 401(k) plans, 401(a) plans offer employers full control over eligibility criteria, contribution levels, and vesting schedules.

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Key Features of 401(a) Plans

  • Eligibility and Contributions: Employers decide who is eligible and how much they contribute.
  • Mandatory Participation: In some cases, participation in a 401(a) plan may be mandatory for eligible employees.
  • Investment Options: These plans usually offer a range of investment options chosen by the employer.
  • Tax Benefits: Contributions are typically made on a pre-tax basis, reducing current taxable income.
  • Withdrawals: Withdrawals are taxed as ordinary income, and early withdrawals may incur penalties.

Helpful Tool: Calculate 401(a) retirement income using our payout calculator

Examples of 401(a) Plans in Action

  1. A public university offers a 401(a) plan to its faculty with contributions based on salary and tenure.
  2. A government agency requires all full-time employees to enroll in its 401(a) plan, with the agency matching employee contributions.
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Comparison of 401(a) and 401(k) Plans

Feature401(a) Plans401(k) Plans
EmployersGovernment, NonprofitPrivate Sector, Some Nonprofit
ContributionsEmployer-ControlledEmployee and Employer
EligibilitySet by EmployerBroad Eligibility
Tax TreatmentPre-Tax ContributionsPre-Tax or Roth Options
WithdrawalsTaxed as Income, Possible PenaltiesTaxed as Income, Possible Penalties
Investment ChoiceLimited, Employer-SelectedWider Range, Employee-Selected

Related Reading: 401(a) vs 403(b)

Conclusion

401(a) plans are a specialized type of retirement plan tailored to specific employer types, offering unique benefits and restrictions. Understanding these plans can be crucial for employees in the public and nonprofit sectors. Contact us today for a free quote.

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Questions From Our Readers

What are the benefits of a 401a plan?

Benefits of a 401a plan include employer contributions, tax-deferred contributions, investment earnings, and predictable benefits.

What happens to my 401a when I quit?

When an employee quits, their 401a retirement plan remains with the employer, and the employee cannot take the plan. However, in most cases, the employee can roll over the plan to an IRA or other retirement account.

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

A 401k is a defined contribution plan where the employee and employer contribute. The employer can match contributions and the employee control investment. In contrast, a 401a is a defined benefit plan where the employer only contributes and bears investment risk, and the employee gets a predetermined benefit at retirement.

Can I take money out of my 401a to buy a house?

It is uncommon to take money from a 401a plan to buy a house. Generally, 401a is subject to early withdrawal penalties and taxes and is intended for retirement savings. Still, a 401a plan may permit hardship withdrawals for purchasing a primary residence in certain circumstances.

What can I do with my 401a?

You can leave it with the employer, roll it over to an IRA, take withdrawals (with penalties and taxes) for certain specific reasons, or use it to purchase an annuity.

Do I report 401a on taxes?

Yes, distributions from a 401a plan are taxable and must be reported on your tax return to the IRS.

How much should I invest in 401a?

It depends on your financial goals, risk tolerance, and retirement needs. It is recommended to consult with a financial advisor to determine the appropriate amount to invest in a 401a plan.

Is a 401a considered a 401k?

No, a 401a is a defined benefit plan, whereas a 401k is a defined contribution plan. Therefore, they have different features and rules.

What type of IRA is a 401a?

401a is not a type of IRA. It is a defined benefit plan for government and non-profit organizations. IRA (Individual Retirement Account) is a different type of retirement plan with different rules and regulations.

What is the difference between a 401a and a 457 plan?

401a is a defined benefit plan for government and non-profit organizations, and 457 is a deferred compensation plan for government and non-profit employees. They have different contribution limits, rules, and vesting schedules.

Is a 401a a pension?

Yes, a 401a is a defined benefit plan, also known as a pension plan, which provides a guaranteed benefit to the employee at retirement based on a formula that considers salary and years of service.

At what age can you withdraw from 401a?

You can withdraw from your 401a account starting at age 59 1/2. However, if you withdraw earlier, you will face a 10% penalty and taxes.

Do I have to pay taxes on a 401a?

Yes, you must pay taxes on contributions and withdrawals from a 401a. However, contributions are made pre-tax, and the money grows without taxation until distributions are taken. Withdrawals are taxed as ordinary income.

How do I get money out of my 401a?

You can withdraw funds from your 401a account by submitting a withdrawal request form to your plan administrator. Depending on the type of account, you may be able to receive a lump sum or smaller payments over time. Some plans may also allow you to take a loan from your 401a, although this will depend on the rules of your specific plan. Discuss the withdrawal options with your plan administrator to determine the best plan for your needs.

Does a 401a affect Social Security?

No. A 401a does not affect Social Security.

Can you have both 401a and 401k?

Yes. You can have both a 401a and a 401k.

What happens to my 401a when I retire?

It can be withdrawn or rolled over to an IRA or IRA annuity.

Can I convert a 401a to a Roth IRA?

It depends on the plan’s rules and the tax implications.

What are the 401a distribution rules?

The 401(a) plan is an employer-sponsored retirement savings plan. Distribution rules for 401(a) plans dictate that withdrawals can typically begin at retirement or termination of employment. Early withdrawals before age 59½ may incur a 10% penalty unless exceptions apply (e.g., death, disability). Required minimum distributions (RMDs) start at age 73.

Can I execute a 401a plan rollover to an IRA?

You can transfer funds from a 401(a) plan to an Individual Retirement Account (IRA). Doing so allows you to consolidate retirement assets and access a broader range of investment options. Always consult a financial advisor and ensure rollovers are done appropriately to avoid unintended tax consequences.

What are the contribution limits for 401a plans?

Contribution limits for 401(a) plans can vary based on the plan’s specific provisions and the employer’s discretion. Typically, combined employee and employer contributions can’t exceed the lesser of 100% of the participant’s compensation or the annual IRS limit ($66,000 in 2023, subject to inflation adjustments). Always check current IRS guidelines and your specific plan document.

How do the tax rules for 401a retirement plans differ from other retirement accounts?

401a retirement plans are employer-sponsored and typically funded by mandatory employee and employer contributions. The contributions are pre-tax, reducing taxable income. While 401a plans share similarities with 401(k) plans, their contribution limits, eligibility, and distribution rules can differ, making it essential to consult specific plan details.

Why does my company only allow me to withdraw 80% of my 401a when I retire, and hold the other 20%?

Due to tax withholding requirements, your company might hold back 20% of your 401(a) withdrawal at retirement. In the United States, when you withdraw funds from a retirement account like a 401(a), the IRS requires a certain percentage to be withheld for federal income taxes.

If you’ve been recently let go from your job and have been contributing to a 401(a) account, can you roll it over to another account before age 59?

Yes, you can. Once you’re separated from your employer, you have the option to roll over your 401(a) funds into an Individual Retirement Account (IRA) regardless of your age.

Are 401(a) distributions taxable?

Yes, distributions from a 401(a) plan are typically taxable. This type of retirement plan is funded with pre-tax dollars, meaning that taxes on contributions and their earnings are deferred until withdrawal. When you take distributions from a 401(a) plan, the amount withdrawn is subject to income tax at your current tax rate.

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Shawn Plummer is a Chartered Retirement Planning Counselor, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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