What Is 401A Retirement Plan?

401(a) plans build retirement savings tax-free.

401(a) plans build retirement savings tax-free.

A new job or a promotion in the public sector or a non-profit may introduce you to a new savings benefit: the 401(a). Employers, especially school districts, view 401(a) retirement accounts as an incentive to keep employees, staff less-desirable locations and recognize achievements. Having one does not prevent you from socking away part of your paycheck for other work-sponsored retirement savings programs such as 457(b), 403(b) and 401(k).

Funding

401(a)s earned the nickname "employer-only" because, unlike other retirement savings programs, employees usually do not contribute to them. Employers make direct contributions on your behalf, based on a percentage of your salary or a set dollar amount. According to the Internal Revenue Service, as of 2012 the law limits annual contributions to 25 percent of your salary or $50,000, whichever is less. Employers can ask for mandatory employee contributions; some even allow voluntary participation.

Vesting

A major perk to having an employer-funded 401(a) is you usually become 100 percent vested regardless of how long you've been employed. Some employers tie vesting to years of service as an incentive for you to stay. Your ownership of the money they contribute increases with seniority. Any contributions you make, as well as any related earnings, will always be fully vested.

Access

Generous plans include a loan option so you tap into your 401(a) when you need cash. The IRS allows participants to borrow as much as $50,000, provided they repay it with interest over a maximum of five years in regular installments. If your plan doesn't do loans, you'll only get the money through service separation, retirement, total disability or when you hit 59 1/2. When you die, the balance goes to your beneficiaries.

Tax Considerations

Contributions and earnings accumulate tax-free in a 401(a) plan, but that doesn't apply to distributions. Plan administrators subtract 20 percent for federal taxes when you take money out, unless you're rolling it over into an IRA or other retirement plan. Should you change employers voluntarily, or retire before your plan's designated retirement age, you can still take the withdrawal -- and a 10 percent early distribution penalty.

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