Both 401(a) and 403(b) are retirement savings plans that are being offered to employees who work for public schools and non-profit organizations. These are tax-deferred accounts, meaning that you won't have to pay any taxes on the money you contribute or its earnings until you withdraw it at a later date. There are contribution limits that differ between the two plans. Many employers provide matching contributions for 401(a) and 403(b), but they do not have to. It is up to each employer to decide whether or not he will match these contributions. In some cases, employers may also add funds of their own into the plan as well. Carefully look over your options before selecting a plan so that you can choose what's best for you financially and ensure that it aligns with your retirement goals. While these plans are similar in many ways, they do have their differences. Have questions about 401(a) and 403(b) Plans? Click here. A 401(a) plan is a retirement savings plan to which an employer makes contributions on behalf of its employees (or the employee themselves if self-employed). These contributions grow tax-deferred until withdrawn at retirement age, after which time it is subject to income tax as ordinary income. There's also a 10% penalty for any withdrawals taken before age 59½ unless an exception applies. If you leave your job, you can rollover your 401(a) into another employer's plan if they offer one, but you don't have to. A 403(b) is similar to a 401(a), but it is offered by non-profit organizations rather than for-profit companies. The main difference between the two is that employees of public schools and tax-exempt 501c3 entities are allowed to participate in a 403(b). 403(b) plans are also tax-advantaged plans which means that contributions are not taxed until withdrawn during retirement. There is a 10% penalty for any withdrawals made before the age of 59½ unless an exception applies. Like 401(a) plans, 403(b)s also allow you to make rollovers from one employer's plan to another if they offer one, or into your own IRA if they don't. The contribution limit for 401(a) plans from both the employee's contribution and that of the employer for the year 2024 is $69,000. If your salary is below the contribution limit, the IRS will use your annual salary as the total contribution limit for the year. This is understood because most of your salary should be used for living expenses. On the other hand, the contribution limit set by the IRS for 403(b) plans for the year 2024 is $69,000. A portion of this which is capped at $23,000 is for elective deferrals with catch-up for those over 50 years old at $7,500. Elective deferrals refer to the amount that the employee is allowed to contribute on their own. Any salary that exceeds this limit will not be used for determining contributions and instead, it will be part of catch-up contribution limits if you are over the age of 50. On the employer's side, he may contribute up to $38,500 per year to the 403(b) plan. This amount forms part of the total annual contribution set for 403(b) plans at $69,000. Just like that of a 401(1) plan, if an employer makes an income less than that of the stated annual contribution limit, the basis of the new limit shall be the employee's annual salary. 401(a)s and 403(b)s both offer tax incentives for your retirement savings. For starters, contributions into either plan are not taxed until withdrawn at a later date. This means that any interest or earnings on these funds are also tax-deferred until they're withdrawn during retirement. Qualified withdrawals from both types of accounts will be taxed using the regular income tax of the employee. Qualified withdrawals are those withdrawals that are made upon reaching the age of 55.5 or older. Any withdrawals prior to that age shall be penalized with a 10% early withdrawal penalty plus income tax on the amount. Early withdrawal penalties may only be waived by the IRS in cases where the money needs to be spent for unexpected medical emergencies. Take note that there are other employers who actually give their employees the privilege to go for after-tax contributions for their 403(b) plans. 401(a) and 403(b) plans have a lot of similarities, but there are a few differences between the two plans. Both plans offer major tax breaks on the contributions you make, both being tax-deferred. Both allow your employer to contribute matching funds on top of your own contribution per year, but there are limits to this. There is also a limit on how much you can contribute out of your own pocket. One major difference between the two plans is their eligibility requirements. The plan design which depends on the choice of the employer also differs for both plans. Asking inputs from professional financial advisors will help you understand the ins and outs of both plans to help you make optimal decisions on which plan is best for your needs.
Here we will review the key similarities and differences between 401(a) and 403(b) plans.What Is a 401(a) Plan?
What Is a 403(b) Plan?
Contribution Limits
Tax Benefits
The Bottom Line
401(a) vs 403(b) Plans FAQs
Qualified withdrawals generally refer to withdrawal made upon reaching the age of 55.5 or older, but they may also refer to withdrawals made during unforeseeable circumstances such as medical emergencies.
You may waive the 10% early withdrawal penalty if you use your funds to pay for unexpected medical emergencies. You can also avoid this penalty by using your money to buy a first home, pay for higher education for yourself or your dependents, or carry out certain acts of charity approved by the IRS.
Tax-deferred means that the income tax on any gains or interest earned in your retirement fund will only be paid when you start withdrawing it upon reaching the age of 55.5 or older, or when you actually make a withdrawal.
In a way, yes. You can take withdrawals from your 401(a) and 403(b) plans without incurring penalties after you've reached the age of 55.5.
The 10% tax penalty is calculated on the gross amount of your distribution. The income tax and any other applicable fees are then applied to this amount as well.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
