When contributing to a 401(a) plan, it is important to know all the rules and regulations. A 401(a) plan allows for employers, employees or both to contribute to the plan. These contributions may be mandatory or voluntary. This will be decided by the employer. The employer will also decide whether the contributions are made on an after-tax or pre-tax basis. Most people with 401(a) plans have mandatory contributions with a "pick-up provision." This means that the contributions are made on a pre-tax basis. In some cases, your plan may allow for you to make additional voluntary contributions. If you do this, the contributions will be made on an after-tax basis. One of the rules of a 401(a) is that no voluntary contribution can exceed 25% of your pay.
It is important to be aware of the contribution limits of a 401(a) plan. As of 2009, contributions cannot exceed $49,000. The maximum amount is 100% of your gross salary after picked-up contributions are subtracted. The maximum amount of $49,000 includes your own contributions as well as any that are made by your employer.
If your employer makes any contributions, you are fully invested in those contributions. A vesting schedule may be scheduled by the employer, which will determine when you will have full ownership of the employer contributions. This is important when you leave the company. Depending on how long you have been there, you will be vested to a certain percent. This is the percentage of the amount of employer contributions you are entitled to.
Any contributions made to a 401(a) plan are tax-deferred. This means that you will not be required to pay any income taxes on contributions that were made on a pre-tax basis until you begin withdrawing from the account. If there are assets included in the plan, they will be held in a trust for the benefit of the employee and any beneficiaries.
When it comes time to withdraw from the plan, there are some facts you should be aware of. You are eligible to withdraw when you reach retirement or when you leave the company. There are some important considerations when it comes time to withdraw funds from the 401(a) plan.
You will only pay taxes on the amount that is withdrawn. Any funds that remain in the account will continue to accumulate until they are withdrawn from the account. You will have to follow the employer's plan when you continue to make direct assets that remain in the account. In the event of your death, any amount that remains in the account will be available for distribution to your listed beneficiary. If you elect to rollover any funds from the 401(a), you will be subject to a 20% tax withholding. If you withdraw the funds early, you will incur a 10% penalty.
Due to all of these regulations, you need to know when it is safe to withdraw from the account. You want to try to avoid any additional tax penalties. You are eligible to withdraw from the account upon retirement or when you leave your current place of employment. You can also withdraw funds as a loan as long as your plan allows it. If you remain with the same company, you are entitled to withdraw funds twice per calendar year. This is dependent on the particular plan your employee provides. The additional withdrawals include contributions that were made on an after-tax basis. You may also be able to withdraw if you have reached the age of 59 1/2 and are 100% vested.
Rocco Beatrice, CPA, MST (Master of Science in Taxation), MBA (Master of Business Administration), BSBA (Management/Accounting), CWPP (Certified Wealth Preservation Planner), CMMB (Certified Mortgage Broker), CAPP (Certified Asset Protection Planner), Managing Director, Estate Street Partners, LLC. Mr. Beatrice is an asset protection, award-winning trust, estate planning and tax expert.
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