Saving enough for retirement isn't just about finding extra cash to set aside. You also need the right retirement strategies to help your savings grow over time. This includes choosing the right retirement accounts.
You're probably familiar with the 401(k), but fewer people know about 403(b) and 401(a) plans. Though similar in some ways, there are some important details that set the two apart. You may be eligible to contribute to both plans, but it pays to understand what distinguishes a 401(a) vs. a 403(b).
What is a 401(a)?
What is a 401(a) plan?
A 401(a) plan is an employer-sponsored retirement account that typically houses employer contributions. You usually see them with government agencies, nonprofits, and educational institutions. They can be part of a profit-sharing plan, where the employer contributes a certain amount of money based on a formula, or part of a money purchase plan, where employers contribute a set percentage of employees' income each year.
Some 401(a)s may permit employees to contribute some of their own money to their account on an after-tax basis, and a few may even require it. Employers usually fund 401(a)s with pre-tax dollars and may do so regardless of whether the employee contributes anything.
The employer chooses the investment options available to employees in the 401(a) plan, and employees may choose among them. Generally, 401(a) investment options tend to be pretty conservative.
Exact plan rules vary by company, but in many respects, 401(a)s are similar to 401(k)s. Employers can set a vesting schedule, which controls how much of the employer-provided 401(a) funds employees are allowed to keep if they leave the company. Some plans may also permit rollovers from other 401(a)s and loans for those who need quick cash. These plans also have required minimum distributions (RMDs), beginning at age 73.
Tax benefits of a 401(a)
Tax benefits of a 401(a) plan
Since 401(a)s are generally funded with pre-tax dollars, you must pay taxes on your withdrawals from the account, though you don't owe taxes on contributions in the year you receive them. This can be desirable, particularly for those in high tax brackets today. By delaying taxes until retirement, when you may be in a lower tax bracket, you could save yourself some money.
If your employer permits you to make after-tax contributions to your 401(a), you won't owe taxes on these when you take them out. However, you could still owe taxes on your earnings.
Like most retirement accounts, 401(a)s charge a 10% penalty for early withdrawals. This goes away when you turn 59 1/2.
401(a) contribution limits
401(a) plan contribution limits
The maximum 401(a) contribution for 2024 is $69,000. This will rise to $70,000 in 2025. This number includes both employer and employee contributions to the account. Voluntary employee contributions to 401(a)s are capped at 25% of their annual income.
What is a 403(b)?
What is a 403(b) plan?
A 403(b) plan is another retirement plan common to government, nonprofit, and educational employees. However, this one primarily allows employees to make contributions toward their own retirement.
Typically, you elect how much money you want to defer to your retirement account, and your employer places this amount in your 403(b). You can choose from the investments your employer has selected to help your savings grow more quickly.
Matching is possible with 403(b)s, though it's less common than it is with 401(k)s. When employers do offer a 403(b) match, there's often a vesting schedule that determines when those matched funds become yours. However, your personal contributions are always yours to keep.
It's possible for employers to offer both a 401(a) and a 403(b) plan. In this case, they may opt to limit the 401(a) to employer contributions only while allowing employees to contribute to the 403(b).
Tax benefits of a 403(b)
Tax benefits of a 403(b) plan
The tax benefits of a 403(b) are similar to those of a 401(a). Contributions to traditional 403(b)s reduce your taxable income today, but you pay taxes on your withdrawals later. 403(b) withdrawals under 59 1/2 trigger a 10% early withdrawal penalty.
Some employers also give their employees the option to contribute to a Roth 403(b). This is where you fund your account with after-tax dollars. You don't get a tax break today, but you're able to withdraw your contributions and earnings tax-free later on, as long as you're at least 59 1/2 and have had the account for at least five years.
403(b) contribution limits
403(b) contribution limits
The total 403(b) contribution limit is the same as the 401(a) limit -- $69,000 in 2024 and $70,000 in 2025. This includes both employee and employer contributions. However, there are also separate limits on employee contributions.
Employees can set aside up to $23,000 in a 403(b) in 2024 and $23,500 in 2025. Those 50 and older may contribute up to $30,500 or $31,000 in 2024 and 2025, respectively. In addition, starting in 2025, adults ages 60 to 63 may contribute up to $34,750.
403(b)s are also unique in that they enable those with at least 15 years of service with the same employer to contribute an extra $3,000 beyond the standard contribution limits in a given year. But there's a $15,000 lifetime maximum on this. That means if you contribute the extra $3,000 each year, you may only do so for five years. After that, you'll be limited to the standard 403(b) contribution limit for your age.
Related investing topics
Both 401(a)s and 403(b)s can help increase your retirement preparedness. While there's some overlap between the two plans' features, 401(a)s are primarily designed to house employer-provided funds, while 403(b)s typically hold funds the employee has contributed to their own retirement.
FAQ
401(a) vs. 403(b) FAQ
What are the disadvantages of a 401(a)?
Some disadvantages of a 401(a) include limited control over investment options and how much your employer contributes on your behalf. Some people may also find the mandatory employee contribution requirements some 401(a) plans have to be a disadvantage.
Is a 401(a) a good retirement plan?
A 401(a) can be a good retirement plan, especially since it primarily consists of funds your employer sets aside for your retirement. But like all retirement plans, its usefulness depends on the contribution rate, fees, and investment options, among other factors.
Can 401(a)s and 403(b)s be combined?
Some companies may offer both a 401(a) and a 403(b) to their employees. In this scenario, the 401(a) will likely house all the employer-provided funds while employee-contributed funds will remain in the 403(b).
Is a 401(a) or a 403(b) better?
Both 401(a)s and 403(b)s have their pros and cons. However, if you want greater control over your retirement savings' growth, a 403(b) might suit you better because you may get more investment options. You're also allowed to contribute money to the account while a 401(a) may not allow this.
