What Is 401(a) Retirement Plan?

A 401a is also known as a profit-sharing plan.

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A 401(a) retirement plan is an employer-sponsored money-purchase plan that allows you to save money for retirement. Similar to other retirement accounts, 401(a) plans offer employees tax advantages. The employer defines how much the company contributes and the requirements you must meet to receive the contributions. Understanding the rules of your 401(a) retirement plan is imperative to effectively saving for retirement.

Plan Contributions

An employer determines how contributions are made into a 401(a) plan. Your employer can choose to contribute to the plan, allow you to contribute or both. If applicable, your employer decides whether your contributions are voluntary or mandatory, and whether contributions are made on a pretax or after-tax basis. Employer contribution options include the employer paying a fixed amount into your plan, matching a fixed percentage of your contributions or matching your contributions within a given dollar range. The contribution limit was $54,000 for 2017 and is $55,000 for 2018.

Withdrawing From Your 401(a)

You can take qualified withdrawals from your 401(a) plan at retirement age or upon leaving your current employer. The earliest age for retirement is 59 ½. You must pay federal income tax on withdrawals from your 401(a) plan. The IRS assesses a 10 percent tax penalty for early, unqualified withdrawals. If you die before you deplete the funds in your retirement account, the remaining assets are then passed to your beneficiaries.

Other Considerations

You should take certain features of a 401(a) plan into consideration. You are prohibited from ceasing your mandatory contributions. Once you decide to participate in the plan, the decision is irrevocable. You can start or stop voluntary employee contributions at any time. You must abide by the contribution limits established by the IRS, or you could face penalties. From the start of the plan, you are 100 percent vested in your employee contributions and earnings. This means you are entitled to receive your retirement account in full upon departure from your employer.

Some Advantages

Employer contributions are mandatory, even if you do not contribute to your plan on a voluntary basis. Another advantage is that you can reduce your taxable income through pretax contributions while you save money for retirement. The earnings of a 401a plan accumulate tax-deferred, meaning you do not pay taxes until you withdraw the money. Another benefit is if you change employers, you can roll over your savings to a public-sector 401 plan, a 403(b) annuity plan, a 457 plan or an IRA.