401(a) Accounts - The Basics
A 401(a) account is technically a “pension” plan but looks and feels very much like a typical retirement account. Savings in 401(a) are invested in the account on a tax-advantaged basis, meaning no taxes are paid on the growth. Instead, the money is taxed as income when it is withdrawn in retirement at which point you can use the money as you see fit. Many districts I’ve seen make the contributions to their teachers’ 401(a) accounts on their behalf, but some do allow the teachers to make contributions, with some allowing them to specify whether or not they want them treated as pre-tax or after-tax.
Many districts utilize 401(a) accounts because they offer two important things: control and incentive. Districts are able to be very specific in the design of their 401(a) plans, giving them control over the provider, contributions, investment choices, vesting schedule, forfeitures, and other stipulations. In terms of control, it’s quite a departure from 403(b) plans. This holds true especially in regards to contributions, where districts retain the right to provide for mandatory contributions by teachers and how much those will be.
Districts also utilize 401(a) accounts for an incentive for teachers to stay with the district long-term. This is done through a vesting schedule which stipulates how long a teacher must be employed before he or she can leave and take part or all of what the district has contributed. If the teacher leaves before that time, the district will reclaim part or all of the contributions it made as a forfeiture. It can then use forfeitures how it sees fit, as long as it abides by certain rules. Generally, full vesting can take 10-20 years depending on the plan, with some plans allowing partial vesting at 5-10 year intervals.
On Tuesday, we'll cover tips for 401(a) accounts, but for now you can learn more by reading these articles:
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Mychal Eagleson, CFP®, ChSNC®, AAMS® is the President of An Exceptional Life Financial, a firm that specializes in financial planning for teachers and families with special needs. He frequently writes and speaks on personal finance topics relating to these clients. Mychal also serves on the board of the Financial Planning Association of Greater Indiana as the Director of Public Relations & Social Media. To read more of his articles and learn about An Exceptional Life Financial please visit: www.anexceptionallifefinancial.com.