Difference between 401(a) and 403(b)
The United States offers various types of retirement plans to help individuals save for their golden years. Two popular options are the 401(a) and 403(b) plans. While both are employer-sponsored retirement accounts, they have distinct features and eligibility requirements. This article aims to highlight the differences between the 401(a) and 403(b) plans.
Eligibility
One of the primary differences between 401(a) and 403(b) plans lies in their eligibility. A 401(a) plan is typically offered by private sector employers, including corporations and small businesses. On the other hand, a 403(b) plan is designed for employees of public schools, colleges, universities, and certain tax-exempt organizations.
Account Types
Another significant difference is the account types available under each plan. A 401(a) plan generally offers a choice between a defined benefit (DB) plan and a defined contribution (DC) plan. A DB plan guarantees a specific retirement benefit based on the employee’s salary and years of service, while a DC plan allows the employee to contribute a portion of their salary to a tax-deferred account.
In contrast, a 403(b) plan primarily offers a DC plan. Employees can contribute a portion of their salary to a tax-deferred account, which can include traditional 403(b) accounts, Roth 403(b) accounts, and employer contributions.
Contribution Limits
The contribution limits for 401(a) and 403(b) plans also differ. For the 401(a) plan, the annual contribution limit is determined by the specific provisions of the plan, but it cannot exceed the annual limit set by the IRS for defined contribution plans. As of 2021, the annual contribution limit for 401(a) plans is $58,000, with a catch-up contribution of $6,500 for individuals aged 50 or older.
For 403(b) plans, the annual contribution limit is the same as that for 401(a) plans, but with a lower catch-up contribution of $3,000 for individuals aged 50 or older.
Investment Options
Investment options available under 401(a) and 403(b) plans may also vary. A 401(a) plan typically offers a wide range of investment options, including mutual funds, index funds, and annuities. Employees can choose from a menu of investment options based on their risk tolerance and retirement goals.
In contrast, 403(b) plans often have a more limited selection of investment options, primarily due to the nature of the tax-exempt organizations that sponsor these plans. However, some plans may offer a broader range of investments than others.
Withdrawal Rules
Withdrawal rules for 401(a) and 403(b) plans also differ. Generally, employees can withdraw funds from a 401(a) plan after reaching age 59½ or upon separation from service. Withdrawals before age 59½ may be subject to a 10% early withdrawal penalty, along with regular income taxes.
For 403(b) plans, the same withdrawal rules apply, but employees may have additional restrictions if the plan is sponsored by a church or other religious organization.
In conclusion, the difference between 401(a) and 403(b) plans lies in their eligibility, account types, contribution limits, investment options, and withdrawal rules. Understanding these differences can help individuals choose the most suitable retirement plan for their needs.
