401a vs 403b: What is the difference?

This content has been reviewed and edited by an Investment Advisor Representative working for Global Predictions, an SEC-registered Investment Advisor.

Let’s be honest—retirement planning can sometimes feel like you’re swimming through a sea of confusing letters and numbers. Ever heard of 401(a), 403(b), or even 401(k) and thought, 'Wait, what does all this actually mean?' Don’t worry, we’ve all been there. If you work for a school, a non-profit, or a government agency, you might have come across 401(a) and 403(b) plans. At first glance, they might seem pretty similar, but there are some big differences between the two that can impact how you save for retirement. So, let’s walk through it together—step by step—so we can figure out which plan makes the most sense for you.

Key Takeaways

• A 401(a) is a retirement plan often offered by government agencies, educational institutions, and non-profits with mandatory contributions.
• A 403(b) plan, on the other hand, is similar to a 401(k) and is usually available to employees of non-profits, schools, and hospitals, featuring voluntary contributions.
• Understanding the rules for contributions, employer matching, and tax benefits can help you make the most of these plans.

What is a 401(a) Plan?

A 401(a) plan is something you might come across if you work for a school, a government office, or certain non-profits. So, what makes it unique? Well, the contributions are mandatory. Your employer calls the shots here—they decide how much gets contributed, and you just go with it. At first, it might feel a little rigid, but honestly, it’s a hands-off way to save consistently for retirement without overthinking it. We all know how easy it can be to put saving on the back burner, so having this built-in structure can be a real benefit.

Here’s what sets a 401(a) apart:

• Employer-Driven Rules: Your employer decides the details—like how much gets contributed to the plan—and you just roll with it.
• Mandatory Contributions: Unlike other plans, you don’t get to choose how much to put in. That might sound strict, but it also takes the pressure off deciding how much to save every month.
• Tax Benefits: The money goes in pre-tax, so you’re reducing your taxable income right now. Plus, the funds grow tax-deferred until you need them in retirement.

Hypothetical Scenario

Imagine you work for a state university, and they require you to contribute 5% of your salary to a 401(a) plan. Your employer matches this by contributing another 5%. If your salary is $60,000 per year, this means you and your employer are each contributing $3,000 annually to your retirement account. Over time, this mandatory savings approach can build a solid foundation for your retirement.

What is a 403(b) Plan?

A 403(b) plan, on the other hand, gives you a lot more flexibility. It’s designed for employees of non-profits, public schools, and some hospitals, and it works kind of like a 401(k). The big difference here? You decide how much of your paycheck you want to put into the plan. It’s a great option if you prefer to have control over your contributions and savings strategy.

Here’s the scoop on 403(b) plans:

• You’re in Control: Unlike a 401(a), contributions here are totally optional. You get to decide how much of your paycheck goes into the plan, as long as you stay within IRS limits.
• Employer Matching: Sometimes, your employer will kick in extra money as a match, but that’s up to them. If they do, make sure you take advantage of it!
• Tax Benefits: You can choose to contribute pre-tax dollars (traditional 403(b)) or go with after-tax dollars (Roth 403(b)), which means your earnings can grow tax-free.

Hypothetical Scenario

Let’s say you’re a teacher at a public high school. You decide to contribute 10% of your $50,000 salary to your 403(b) plan, which amounts to $5,000 annually. If your employer matches 3%, that’s an extra $1,500 added to your account each year. Over time, these voluntary contributions, combined with employer matching, can significantly boost your retirement savings.

Key Differences Between 401(a) and 403(b)

Which Plan is Better for You?

So, which one makes sense for you? Well, it really depends on what works for your style of saving:

• Prefer something automatic and hands-off? A 401(a) might be just what you need. The mandatory contributions mean saving for retirement happens without you lifting a finger.
• Want more control and flexibility? A 403(b) lets you decide how much to save, and you even get the option to go with Roth contributions for tax-free income later.
• Employer Matching? Whether it’s a 401(a) or 403(b), if your employer is offering to match your contributions, don’t pass it up. That’s free money to help grow your retirement savings!

Can You Have Both a 401(a) and a 403(b)?

Yes, it is possible to have both plans if your employer offers them. For example, some universities provide a 401(a) with mandatory contributions and a 403(b) for additional voluntary savings. This setup allows you to maximize your retirement contributions while benefiting from both plans.

FAQs

Are contributions to 401(a) and 403(b) tax-deductible? 

Yes, contributions to a traditional 401(a) and 403(b) are made with pre-tax dollars, reducing your taxable income. Roth 403(b) contributions, however, are made with after-tax dollars.

Can I withdraw money from these plans early? 

Early withdrawals before age 59½ may result in taxes and a 10% penalty. Some exceptions apply, like financial hardship or specific retirement provisions.

Do both plans have contribution limits? 

Yes. For 2024, the contribution limit for a 403(b) plan is $23,000 (or $30,500 if you’re over 50). 401(a) contributions are determined by the employer but must follow IRS rules for total contributions.