What Is a 401(a) Retirement Account?

Although you might have heard of a 401(k), a 401(a) is a lesser-known retirement savings plan. These 401(a) plans are commonly offered by government employers. An employer that offers a 401(a) can decide who may contribute and who may not. The employer may match your contributions up to a certain limit. Plan details vary among employers, but 401(a) plans share key characteristics.

The employer basically makes all the rules regarding the 401(a) plan. In general, 401(a) plans can allow contributions by the employer, by the employee, or by both. The employer determines whether contributions are voluntary or involuntary. With involuntary contributions, a specific amount is deducted from your paycheck automatically. The Internal Revenue Service limits the amount you can contribute to a 401(a) annually. For 2014, the total contribution limit is $52,000. Your employer also determines whether the plan is funded with pretax or after-tax dollars. If your 401(a) contributions are made with pretax dollars, you receive the benefit of a lower taxable income.

The money in your 401(a) isn't taxed until it's withdrawn. If you fund the account with pre-tax dollars, state and federal income taxes and withholding on that money are deferred until you withdrawal it from the account. Once you start withdrawals at retirement age, you're taxed on the entire amount you withdraw. Funds that stay in the plan continue to grow tax-deferred.

Although you may withdraw your voluntary contributions, you are not eligible to begin taking withdrawals until you retire or leave your employer. While you are still employed, you can take two withdrawals per year if you're at least age 59 1/2. If your funds are eligible for a rollover, only a direct rollover into a qualified private-sector employer plan or an individual retirement account will avoid mandatory 20 percent federal tax withholding.

Money in the 401(a) plan is invested to maximize your retirement savings potential. Although your employer chooses the options available, you select which type meets your needs. A 401(a) plan can include a range of options, conservative and aggressive. If you want to go conservative, choose a certificate of deposit. Higher-risk investments generally include stocks. You can create a diverse portfolio or you can stick with just one type of investment.