401(a): Understanding What a 401(a) plan is with Ease

401(a) plan rollover to IRA
Image Credit: Monash University

Over the past decade, 401(a) has become a popular term on the lips of government and private employees alike. It turns out individuals are now more conscious about the future which is exactly what a 401(a) plan is meant for. A means to secure the future financially. Yea, there are tons of options out there also capable of achieving this purpose but it will be unwise to attempt going for every one of them at the same time. So this post and its likes will come in series, feeding you with all the information you would need to make a more calculated decision as to which one to go for. However, for the purpose of this article, we will only go through what you should know about 401(a) plans and the 401(a) rollover to IRA.

This is because, for some of us, this is still a strange term. The ensuing paragraphs will guide every step of the way.

So let’s get cracking …

What is a 401(a) Plan?

Just like its direct counterpart, 401(k), the 401 series is a sort of retirement savings plan whose name was coined out from Section 401 of the US Internal Revenue Code. These plans literally help to foster a stress-free retirement for government employees.

But just in case you need a general definition for 401(a) plans, here is one;

A 401(a) is termed as a retirement savings plan that affords government employees the luxury of accumulating dollars on a tax-credit basis for the purpose of retirement in which the aforementioned contributions come from the participant, the employer, or both.

In other words, for this to work effectively, the contributions from the employers and employees will have to be on an agreed percentage basis.

How Do 401(a) Plans Work?

Tons of retirement plans exist for different employers and employees alike, with each of them coming with restrictions, stipulations and more favorable conditions for certain kind of employees.

For the most part, 401(a) plans are designed to target individuals working in non-profit establishments, government agencies and educational institutions. Therefore it’s safe to say that beneficiaries of this plan include teachers, government employees, support staff and administrators. Basically, all fall under the general term, “Civil Servants.”

Like I mentioned earlier, there are other 401-based plans asides 401(a). A typical example is the 401(k) plan (a plan that features profit-based organizations). But mind you, the terms and condition of 401(a) plans prohibit employees from accessing 401(k) plans on a go.

On the flip side, if an individual decides to leave his employer, he/she has the option of moving their funds from their 401(a) accounts to a 401(k) or an individual retirement account.  

Furthermore, to a large extent, employers control a huge part of this retirement plan, using them as bait to keep employees for longer period of time. They literally dictate the vital aspects such as contribution amounts and limits, vesting schedules, eligibility criteria and so on.

However, to become a beneficiary of 401(a) plans, you need to have been working in the establishment for a minimum of 2 years with a minimum age limit of 21 years. While this is a general condition for participation, employers wield the power to enforce what condition works best for them.

Contributions for a 401(a) plan

401(a) plan contributions could be either voluntary or mandatory which could be paid on either a pre-tax or post-tax basis.

Yea, that almost sounded like the employee had some sort of options to pick from here.

Well, my advice is, pay less attention to how it sounded and come to terms with the fact that the employer is always the dictator.  They even go as far as contributing these funds on behalf of their employees. In other words, on default, the funds are set to go off their salaries.

But these deductions are often made on either a percentage or specific-dollar-range basis. Some employers are often lenient enough to involve employees, especially with the percentage issues.

For voluntary 401(a) contributions, it is important to note that employers put the peg at 25% the employee’s yearly pay.

Investments for a 401(a) Plan

The tyranny of employers continue here as they remain in control when it comes to employee’s investment choices.  

But here’s the great part; they are in a way obligated to pick only the most secure investment options for their employees. This is in a bid to clamp down on investment risks.

Furthermore, by the end of civil service, the plan guarantees confident level of retirement returns. However, this would also require a level of commitment from the employee to meet certain retirement goals.

Vesting and Withdrawals for a 401(a) Plan

Conventionally, all 401(a) contributions and subsequent yields often undergo vesting immediately. By vesting, I mean

the process of earning an asset, like employer-matched contributions to your 401(a) over time.

Vesting schedules set up by employers are major determinants to becoming completely vested. For some employer in 401(k) plans, it has become a common practice to link vesting conditions to years of service. This basically acts as incentives to keep employees in service for a longer period of time.

Furthermore, 401(a) withdrawals are often subjected to income tax withholdings plus a withdrawal penalty of 10%. Exceptions to this rule include scenarios where the employee clocks 59 and half years, becomes disabled, dies, or gives consent to rollover their funds to certified retirement or IRA plans. In this case, it would have to go through a system known as direct trustee-to-trustee transfer. 

Qualifying For Tax Credits

Eligibility for Tax Credit is pretty simple. Basically, any employee under the 401(a) plan can qualify. However, while an employee can have both an IRA and a 401(a) plan simultaneously, tax benefits for one of them will have to be forfeited if he decides to run both plans at the same time.

401(a) Rollover to IRA

401(a) rollovers to IRA may have sounded like an impossible feat before now. But you should have realized earlier in this post that sounds are deceptive.

You can undeniably rollover your 401(a) varieties into IRA while avoiding taxes in the process. This comes with a condition though; you need to observe the rules of the Internal Revenue Service. And more importantly, plans in question need to be categorized under Qualified Employer Plans (plans that meet the IRS requirements)

Lucky you, 401(a) plans fall under this category. However, it is important to note that there are some exceptions. Some of which include; substantially equal periods of payments, amounts distributed to correct excess distributions, hardship distributions, and minimum distributions.

Disclosures of 401(a) rollover to IRA

Before attempting a 401(a) to IRA rollover, there are series of disclosures, and considerations you need to be aware of. The most important of which is being aware of your responsibilities and rights. And in this case, the right to a free tax rollover to IRAs. You should also understand the difference in rules between the IRA and old plan. Stating and discussing these rules are beyond the scope of this post, hence we’ll be going through this in a different one.

In Conclusion

While it is natural for most employees to be dismissive about retirement plans now, reports have confirmed that over time, this is usually not the right play. If you take the time to ask questions, you would find out that this set of people end up with regrets.

This doesn’t mean I wholeheartedly endorse retirement plans as the best investment option, it just means that as civil servants investment options are usually limited. And most times, a pretty low salary scale is usually a factor. But regardless of this factor, if we really look at this logically, retirement plans help in ways you can’t comprehend yet. Plus the investment side has a great touch to it even though it usually feels like you have literally no control over the process.

Nevertheless, trust me when I say this’ better than nothing because the future is closer than you think.

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