401a Retirement plans, or money-purchase plans, are retirement savings plans in which you - the employee - can’t choose or change the amount contributed to the plan.
The days that employees would commit their entire working lives to a single employer in order to gain a pension from that employer are long gone.
But the voluntary nature of defined contribution plans that replaced the old defined benefit plans had the result that, in many cases, you will have less money in your defined contribution account at retirement than you require for retirement.
The money-purchase retirement savings plan is set up by your employer. Typically to retain the services of certain categories of employees. Your employer can set up a different plan for different categories of employees.
401a Retirement plans are mostly plans with only the employer contributing to the plan. Your employer's contribution is effectively free money. You are not taxed on the contribution and the income of the retirement savings plan is tax deferred. This means that you'll only pay income tax when you start withdrawing from the retirement savings plan.
In some cases the plan is set up by your employer in such a way that you – the employee – also contribute to the money-purchase plan. The contribution is usually a percentage of your income and you can't choose or change this percentage.
When you change your job you can roll your money-purchase plan over into any other plan offered by your new employer. The withdrawal rules are the same as for other plans. See our discussion on 401k Early Retirement for more information regarding withdrawals.
You can participate in a 401a money-purchase plan even if you already have an Individual Retirement Arrangement (or IRA).
So should you participate when offered to join a 401a plan? Absolutely. You need to participate in as many retirement provision plans as you can and to the full limit of the favorable tax dispensation allowed.
You can't over provide for your retirement. To the contrary, most people make inadequate retirement provision. I was one of them! And to rectify that situation, later in life when you are approaching retirement, is much more of a challenge.
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