What Is a 401(a) and Should You Open One?

Saving for retirement is one of the most important financial steps you can take. If you don’t, you could end up entering what should be your golden years struggling to make ends meet. One of the most common ways to save for retirement is to use a workplace retirement plan. While most people use a 401(k), there are other workplace retirement plans you might have access to, such as a 401(a) plan.

A financial advisor could help you put a financial plan together for your retirement needs and goals.

What Is a 401(a)?

A 401(a) is a workplace retirement plan typically offered by government agencies, educational institutions and non-profit organizations. Specifically, a 401(a) is a money-purchase retirement plan. Unlike other retirement savings options like an individual retirement account (IRA), you can’t open a 401(a) — or any other employer-sponsored retirement plan like a 401(k) or a 403(b) — by yourself. Workplace retirement plans are only offered through an employer.

A 401(a) plan is unique from other workplace retirement plans because the organization sponsoring the plan gets to decide who is eligible for participation. Unlike 401(k) plans, which are generally offered to all full-time employees, employers often offer 401(a) plans as a benefit to specific employees to make a job more lucrative. Government employees, teachers and administrators are typically the types of employees who participate in a 401(a) plan.

Additionally, the organization has the option of making participation in the plan mandatory for eligible participants. It can also opt against making participation mandatory and allow employees to choose whether or not to make contributions.

How Do 401(a)s Work?

A 401(a) plan functions like most workplace retirement plans. You put money into an account, and that money is then placed in different funds. Your money will be invested in a variety of stocks, bonds and other investments, and eventually, you’ll use the proceeds from your account to fund your retirement. With a 401(a), employers tend to have greater control of their employees’ investment choices. For instance, government agencies may limit employees’ choices to particularly safe, low-risk investment options.

Employers may require participation if they offer a 401(a). You should also note that the organization will set the contribution model. This means that rather than employees determining how much they want to contribute, the employer will set contribution amounts. Employers are required to contribute regardless of whether or not the employee voluntarily contributes.

With a 401(a), the employer can determine whether contributions are made on a pre-tax or after-tax basis. All of your contributions and any interest you earn on those contributions are immediately fully vested. It’s up to the employer to determine the vesting schedule for employer contributions.

401(a) vs. 401(k)

As workplace retirement plans, there is some overlap between 401(a) and 401(k) plans. Here are the similarities between the two:

You can contribute money either before or after taxes. For 401(a) plans, this is determined by the employer. With 401(k) plans, this depends on which type of 401(k) you have. You fund traditional 401(k)s with pre-tax money and Roth 401(k)s with post-tax money.
Your contributions are invested into various funds.
You withdraw your money in retirement. This is when you pay taxes if you made your contributions pre-tax.

However, there are also a lot of distinctions between the two workplace retirement plans. Here are the major differences:

Private corporations generally offer 401(k) plans, while public sector workers like teachers are more likely to have access to a 401(a) plan.
With a 401(k) plan, employees always get to choose whether to participate. Some 401(a) plans are mandatory.
The employer sets the contribution amounts for 401(a) participants. 401(k) participants get to pick their own contribution levels.
As of 2022, the annual contribution limit for a 401(a) is $66,000. For a 401(k), it’s $22,500.

Who Should Get a 401(a) Plan?

While corporations typically offer 401(k) plans, public-sector employers usually offer 401(a) plans. This includes educational institutions, government agencies and non-profits. Eligible employees may include teachers or government workers.

If your employer offers a 401(a), you may not have an option on whether to participate. In some instances, the employer can require participation and set contribution amounts, requiring you to contribute a set amount of money to your account.

If you don’t work somewhere that offers a 401(a) plan, you don’t have the option of opening one. You’ll need to find another method for retirement savings.

Bottom Line

Workplace retirement plans are an important way to save for your retirement. They are offered by your employer and can serve as a simple way to make sure you are on your way to being ready for retirement. One of the lesser-known workplace retirement plans is the 401(a) plan. Public-sector employers, including government agencies, educational institutions and non-profit organizations, typically offer 401(a) plans to certain employees as an added benefit or perk. Unlike a 401(k) or a 403(b) plan, the employer can make participation in a 401(a) plan mandatory.

Retirement Planning Tips

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During the retirement planning process, it’s important to think about the retirement tax laws of the state you want to retire in. By minimizing your retirement tax burden, you can maximize the value of your savings in retirement.