What is a 401a retirement plan?

401a - definition - a retirement plan named after a section of the Internal Revenue Code that enables a school district employer to offer teacher employees additional incentive and matching benefits.

These retirement plans are sometimes referred to as Teacher Incentive and Teacher Matching programs. They work by the school employer deciding on a match provision or the employer makes a direct contribution to the plan. You reduce your current income taxes while you boost your retirement investments. Your contributions may be made on either a mandatory or a voluntary basis. The employer decides on the method of participant contribution, as well as whether participant contributions will be made on a pre-tax or an after-tax basis.

Specific laws and regulations vary state to state. There are no constraining employer discrimination rules in regards to the contributions made, which creates flexibility and opportunity for individually tailored benefits.

For example an employer may take into account job performance, teaching specialities or attendance to fit the particular needs of an employee.

Employer contributions to your 401 plan may be made under one of the following methods:

1. The employer may contribute a fixed dollar or percentage amount, either with or without a required employee contribution.

2. The employer may match a fixed percentage of employee contributions.

3. The employer may match the participant contribution within a given range (i.e. a variable employee match).

Pre-tax contributions are not subject to federal and state income taxes until withdrawn. When an employee resigns, funds that are non-vested can be used to offset other expenses and pay for unused sick leave. Distributions from the 401a plan can take several forms, including lump sum, rollover or an annuity type payment.

401a plans are particularly attractive when used as an incentive for retaining key specific groups of educators.

Keep in mind that if your employer’s plan has mandatory contributions, you cannot stop contributing to the plan. The decision to participate is a one-time, irrevocable decision, and you are 100% vested in your employee contributions and earnings.

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