What is a 401(a)?
401(a) plan is a tax-qualified retirement plan employers typically offer their employees. This plan is similar to the more commonly known 401(k) plan, but some key differences exist.
In a 401(a) plan, an employer contributes funds to the plan on behalf of the employee. The contributions can be made pre-tax or after-tax, depending on the plan design. The funds in the plan grow tax-free until they are withdrawn. Once the funds are withdrawn, they are taxed at the individual’s income tax rate at that time.
One of the main advantages of a 401(a) plan is that the employer can customize the plan to meet the organization’s and its employees’ needs. For example, the employer can set the contribution limits and vesting schedules. This can be used as a retention tool to encourage employees to stay with the company for a certain period of time.
Another advantage of a 401(a) plan is that it can be used to supplement other retirement plans, such as an IRA. This allows employees to save more for retirement and potentially lower their tax burden.
The employer has a great deal of control over the plan, which means that employees may have limited investment options or may not have as much say in the plan design.
To participate in a 401(a) plan, employees must typically complete a form their employer provides. This form will include information about the plan, such as the contribution limits, vesting schedule, and investment options. It is important for employees to carefully review this information before making decisions about their retirement savings.
In conclusion, a 401(a) plan can be a valuable tool for employees looking to save for retirement. However, it is important to carefully consider the plan design and understand the potential advantages and disadvantages before making decisions about participation.