403(b) / 401(a) Plans

403(b) Plans

A retirement plan similar to a 401(k) plan, but one which is offered by non-profit organizations, such as universities and some charitable organizations, rather than corporations.

There are several advantages to 403(b) plans: contributions lower taxable income, larger contributions can be made to the account, earnings can grow tax-deferred, and some plans allow loans. Contributions can grow tax-deferred until withdrawal at which time the money is taxed as ordinary income (which is sometimes a disadvantage).

Participants may make salary deferral contributions that are usually limited by regulatory caps. Individual accounts in a 403(b) plan can be any of the following types:

  • An annuity contract, which is provided through an insurance company
  • A custodial account, which is invested in mutual funds
  • A retirement income account set up for church employees

401(a) Plans

The 401(a) plan is primarily used by government employers and is typically custom-designed plans that are only offered to key employees as an added incentive to stay with the operation. Many educational institutions and non-profits, for example, use 401(a) plans to fund retirement savings for certain employees.

The 401(a) plan allows for contributions by the employee, the employer, or both; with contribution amounts, whether dollar-based or percentage-based, eligibility, and vesting schedule all determined by the sponsoring employer.

Employers are able to create multiple 401(a) plans, each with different eligibility criteria, vesting schedules and contribution amounts. For this reason, the 401(a) plan is commonly used by employers to create inventive programs to help retain employees.

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