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401(a) Vs 403(b) Retirement Saving Plans: What’s the Difference?

401(a) and 403(b) both offer tax benefits for your retirement savings. While they are very similar, a 403(b) is different than a 401(a) plan. We will discuss both plans as well as laying out the key differences between the two. In the meantime, you can always talk to a financial advisor to assess your financial goals and risk tolerance and learn more about the 401(a) vs 403(b) comparison.

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401(a) vs 403(b): A quick overview

Here’s a quick overview on the 401(a) vs 403(b) comparison.

Both 403(b)s and 401(a)s are tax-advantaged retirement plans. They have valuable tax benefits for retirement savers. A 401(a) and a 403(b) plan are both offered by government agencies, public schools and nonprofit organizations. Participants are usually government employees, public school teachers, nurses, doctors, librarians, etc.

In these accounts, your money grows free of taxes until you take it out. That means dividend and interest income accumulate on a tax-deferred basis.

401(a)s and 401(b)s resemble 401(k) plans. The main difference between is that 401(a)s and 401(b)s are offered by government, public employers, while 401(k) plans are offered by private corporations.

Understanding the 401(a) vs 403(b) comparison, will help you determine which one better suits your needs and goals.

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403(b) plan: how is it different from 401(a) plan?

A 403(b) plan is a type of retirement account that is available for you at your employment. It offers an excellent opportunity to save money for retirement and to receive some extra money in employer matching.

A 403(b) plan is similar to a 401(k) plan. Just like a 401k plan, a 403b lets employees defer some of their salary into individual accounts.

This retirement plan is offered by:

  • public school, college, or university,
  • church, or
  • charitable entity tax-exempt under Section 501(c)(3) of the Internal revenue Code.

Participate in a 403(b) plan

To be eligible, you must be:

  • An employee of a public school system,
  • Faculty or staff of a college or university,
  • An employee of a hospital,
  • Minister of a church.

In a 403(b) plan, your employer decides the investment options. As an employee, you then can choose among the investments available within the plan. So, each individual 403(b) plan can differ significantly.

403(b) plans have an added plus: employer matching benefits are also available. Those benefits usually match the amount you contribute to the plan, dollar for dollar, or 50 cent to a dollar. In addition to the matching benefit, you have options in a 403(b) plan such as requesting a loan, etc.

There is a maximum contribution limit in a 403(b) plan. Just like a 401(k) plan, in 2021, you can contribute up to $19,500 a year. If you are 50 years old or older, you can contribute an extra $6,500 to a total of $26,000 a year in 2021.

Your employer decides where to invest your contributions. The typical choices include companies’ stocks, mutual funds, long term bond fund, money market fund, etc.

Tax benefits

There are tax benefits in a 403b plan. Your contributions are deducted from your paycheck before taxes are calculated. In other words, you don’t pay taxes on your contributions.

However, you must pay taxes on the withdrawals you make in retirement. Another tax benefit for 403(b) plans is that all dividends, capital gains, interest are accumulated tax free until you withdraw them as income.

401(a) plan: how is it different from 401(b) plan?

A 401(a) plan is also a type of retirement plan that employers can offer to their employees. However, just like a 403(b) plan, you have to work for non-profit organization, educational institution or government agencies. In other words, if you work for a private company, it won’t be available to you.

Your employer determines the plan’s investment choices. However the investment options are usually very safe and conservative. Participation in a 401(a) plan is often mandatory.

However, if you leave your non-profit employer, you can transfer your funds to a 401(k) plan or an individual retirement account (IRA). To be eligible, you have to be 21 years and older and have been working in the job for a minimum of 3 years.

In addition, you may qualify for a tax credit. Just as with most other retirement plans, there is a 10% early withdrawal penalty if you withdraw money before you reach the age of 59 1/2.

The contribution limit for a 401(a) plan is $58,000 in 2021, This represents the total contributions you and your employer can make.

However, if your salary is below that amount, you and your employer can contribute up to that salary. For example, if you make $35,000 a year, that is the amount you and your employer can contribute to your 401(a) account.

401(a) vs 403(b): the key differences

A key difference between a 403(b) and a 401(a) plan is the contribution limit. In a 401(b) plan, the contribution limit is $19,500 a year. If you are 50 years old or older, you can contribute an extra $6,500 to a total of $26,000 a year in 2021. Whereas, in 403(b) account, the contribution limit is actually higher. It is $58,000 a year.

Another key difference regarding the 401(a) vs 403(b) question is that the sponsors of a 401(a) usually makes it mandatory for their employees to participate in the plan. Whereas, sponsors of the 403(b) plan generally make it voluntary.

401(a) vs 403(b): Bottom line

Both 403(b) and 401(a) plans are vehicles used in retirement planning. Both accounts are offered by nonprofit organizations, some churches, hospitals, public schools. Employees who can participate in these accounts are often teachers, administrators, nurses, support staff, etc. However, the key difference between a 401(a) and a 403(b) plan is that the sponsors of a 401(a) usually makes it mandatory for their employees to participate in the plan. Whereas, sponsors of the 403(b) plan generally make it voluntary.

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