401(a) tax breaks

[Andreea12]

Are there any tax deductions associated with this type of retirement account: 401(a) that I should be aware of? Thanks!

[MelodyB]

Since contributions to 401(k) and 401(a) plans are tax deductible, plan sponsors generally enjoy a tax benefit as well. The return accrued on the plan sponsor's contributions to the plan is also tax deferred. The annual 401(k) and 401(a) contribution limits are listed on the IRS website.

[TeriH]

Employees who contribute to a 401(a) plan may qualify for a tax credit. Employees can have both a 401(a) plan and an IRA at the same time. However, if an employee has a 401(a) plan, the tax benefits for traditional

IRA contributions may be phased out depending on the employee's adjusted gross income.

In a 401(a) plan, employers can make it mandatory for their employees to participate. But employers are also required to contribute to their employees' accounts. They can also decide whether the 401(a) plan is to be funded with pre-tax or after-tax dollars.

Two year eligibility period.

As with other tax-advantaged retirement accounts, there are strict rules about what you can do with the money in a 401(a) account. If you take money out before you reach age 59½, you may face a 10% penalty, except for certain emergency expenses. It is important to understand the rules for holding and closing your account to avoid unexpected tax implications.

 Most plans cap voluntary contributions to 25% of the employee's take-home pay.

[Kan_EA]

401(a) tax deductions are similar to 401(k), participants do not pay income taxes on contributions or earnings until they make a withdrawal or are transferred to their beneficiary. Contributions may remain tax deferred and allows them to compound until the participant is eligible to take withdrawals for retirement.

[ElizabethW2]

Your 401(a) plan is similar to the traditional 401(k) plans in that both you (the employee) and the employer can make contributions to the plan.  The 401(a) tends to give you more flexibility in the types of investments.  Unlike the 401(k), the 401(a) has a 2-year waiting period before the employee can participate.

If your employer is matching contributions, it is recommended that you maximum that match.  The 401(a) plan has a maximum contribution of 25% of the employee(s)' salary where the 401(k) can be more than 25% as long as it doesn't exceed the annual dollar limit.

Your contribution to the plan is your tax break and maximizing your contribution (the 25% of salary) is your biggest tax savings tool for the current year.

If this information was helpful, please indicate by clicking the thumbs up below.

Elizabeth W, EA

[Opus 17]

A 401(a) is similar to a 401(k), in that any contributions you make are excluded from your taxable income.  You will pay tax on the money when you withdraw it in retirement, and if you withdraw funds before age 59-1/2, you will also pay a 10% penalty.  Also like a 401(k), you can only contribute by payroll deduction, you can't make cash contributions from your bank account.  You may be able to rollover tax-exempt retirement funds from an IRA or previous employer into a 401(a) at your current employer, but that depends on their rules.

The main differences are that a 401(a) plan is used by government and other public employers, while 401(k) are used by for-profit corporations and 403(b) accounts are used by educational institutions and non-profits.  Participation in a 401(a) is often mandatory.

Also, you may have higher contribution limits. The maximum contribution to a 401(a) plan is $66,000, including employee and employer shares.  But a qualifying employer is allowed to offer both a 401(a) and a 403(b), and the contribution limit for a 403(b) is $22,500.  So if you work for a government employer that offers a 401(a) and a 403(b), you can contribute substantially more than someone who only has a 401(k) or 403(b). 

For example, I work at a government university.  I am required to participate in the 401(a) with a mandatory 5% pre-tax contribution, that is matched by the employer.  I can't contribute more.  But they also offer a 403(b) so if I want to contribute more than the mandatory amount, that extra contribution goes into the 403(b). 

[Andreea12]

Great, thanks. To be clear: so there is nothing to fill out during tax season unless I withdraw, rollover, or transfer to beneficiary?

[Opus 17]

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@Andreea12 wrote:

Great, thanks. To be clear: so there is nothing to fill out during tax season unless I withdraw, rollover, or transfer to beneficiary?

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Correct.  Also, make sure that when your tax program asks did you make IRA contributions, you don't report the 401(a).  The 401(a) is reported on your W-2, and you would only enter IRA contributions if you made separate contributions to a private IRA.  (Qualified workplace plans like 401, 403, 457, etc. are not IRAs and are controlled by different laws even though they seem similar.)