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Author: mjolah Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 25316  
Subject: Re: I know it's been done before.. Date: 5/1/2012 9:07 AM
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First, let's me set the record straight/ A "401(k) plan" ***IS*** a 401(a) plan. Code section 401(a) and the sections that follow (there are, I think 31 of them) define what makes a plan a "qualified" plan - that is, a plan that allows the employer to take a deduction for contributions made, but doesn't tax the employee/beneficiary on those contributions (which are items of compensation) until years later, when withdrawn. A 401(k) plan is a subset of 401(a) that allows for employees to defer part of their otherwise taxable income into the plan (under certain conditions) and treat them as "employer contributions" for purposes of the tax deferral. Types of 401(a) plans include profit sharing plans, money purchase pension plans, and "traditional" pension plans. Actually, a 401(k) plan is really a "feature" attached on a "profit sharing plan" (although in some cases, the profit sharing feature is dormant or disabled.)

What your teaching employer refers to as a 401(a) plan is what most would call a "profit sharing" or money purchase plan (depending on whether the contributions are discretionary or mandatory on the part of the EMPLOYER). We don't refer to PS plans as PS plans with respect to governmental/educational or not-for profits entities, as the concept of "profits" is really erroneous (although the plan (if it allows for discretionary employer contributions) is identical, in the eyes of the Internal Revenue Code to a profit sharing plan). A money purchase pension plan is nothing more than plan *requiring* the employer to make annual contributions (as opposed to discretionary ones), usually measured as a percentage of compensation (i.e., 5% of comp is made as a contribution to the plan). In addition, governmental/educational entities can't actually can't actually sponsor a 401(k) plan. PS and MPPP contributions are "over and above" what you are paid (that is, you don't have to defer any of your pay - the employer contribution is truly an "up and extra" to your pay). Governmentals can do a 457 plan (which in many ways is like a 401(k) but with some differences) and educationals can do a 403(b) plan (which can be like a 401(k) plan, but also can be somewhat different, depending on how the employer wants it designed).

Some of the requirements for 401(k) plans (and 403(b) and 457 plans) is that in TOTAL, and INDIVIDUAL can't contribute more the annual limit (which this year is 17,000, plus a catchup if the plan allows and you are over 50) which rises with inflation (in $500 increments). Doesn't matter how many 401(k), 403(b) or 457 plans you participate in (or any combination of the three), you can't defer more than the limit IN TOTAL.

Employer contributions (any match, profit sharing or "401(a)" contributions are over an above that limit (but also have a limit - of $50,000 per employee per employer (i.e. if you are lucky enough to work for multiple employers who are generous, each employer can contribute this amount - subject to certain other restrictions).

The reasons these limits exist, is because the amount of tax deferral created by the imbalance (contributions being deducted currently without any offsetting income tax liability to the employee) is HUGE (in the trillions of dollars) and hence, is limited to that which Congress (and you can argue if they are right) deems necessary for the intended purpose of promoting savings for retirement, and further, promoting "widespread" use of the various plans and features (as opposed to only having such tax deferred benefits available to "those who can afford it or more.")

My advice: defer as much to whatever 401(k), 403(b) or 457 plans that are available (up to the limit, plus catch-up, if appropriate), fund a Roth IRA, if possible, and consider the 401(a) contribution a "gift." You are fortunate to actually have an employer that has made that commitment - it is becoming much more rare.

Sorry for the "primer" on plans, but there is a lot of misinformation out there, and the reasons the rules exist is because, frankly, there have been serious abuses (where management funded benefits for themselves and not the rank and file, etc.).
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