403(b) vs 401(a) vs 457

[Dan32]

A potential job for a friend offers opportunities for savings towards retirement in a 403(b), a 401(a), and a 457. The employer provides up to 4.6% of the salary into the 401(a). Some of this is matching wages. I am not sure why there is both a 403(b) and a 401(a). Can anyone shed some light on why there would be 3 different options? Also is one of the options better than the others?
In my career I only had a 401(k).

 

[copyright1997reloaded]

The terms are from the portion of the tax code, e.g. section 401(k).

401(k)'s are typically done by private (i.e. non-governmental) companies. 401(a)'s are typically done by governmental, educational and non-profits.

401(a)'s have more control than 401(k)'s in terms of who is eligible, mandatory contributions, etc. The IRS also makes it MANDATORY that institutions contribute to their employee(s) 401(a) plans. This is one of the reasons that many educational and non-profits do not offer 401(a) plans, but instead go the 403(b) or 457(b) route.

403(b) outlines plans associated with public schools and non-profit organizations (e.g. 501(c)(3) organizations. 403(b) plans do not require matching by the institution. The IRS has further restrictions on the investments, e.g. annuities, mutual funds. In the old days, 403(b)'s were typically annuities (yuck), but in recent years many funds (including my employers) are more flexible.

457(b) plans are similar to 403(b) plans but there are differences. The 457(b) plan rules state that you don’t have to pay a 10% tax penalty if you resign or retire before age 59.5 and need to withdraw money from your account. However, the 403(b) plan charges the 10% early withdrawal penalty.

Most importantly, you can contribute to BOTH a 457(b) and 403(b). That is, the limits are separate. Let's say you are 55, you can (in 2019) contribute $25,000 ($19,000 + $6,000 catch up) to your 457(b) AND contribute $25,000 ($19,000 + $6,000 catch up) to the 403(b). These rules were changed about 15 or so years ago to allow this:
https://www.irs.gov/pub/irs-drop/rp-04-56.pdf

 

[GenXguy]

You aren't necessarily penalized for withdrawing from a 401K or 403b before 59.5 either due to the rule of 55.


https://www.thebalance.com/what-is-the-rule-of-55-2894280


quote: "The IRS Rule of 55 allows an employee who is laid off, fired, or who quits a job between the ages of 55 and 59 1/2 to pull money out of his 401(k) or 403(b) plan without penalty. This applies to workers who leave their jobs anytime during or after the year of their 55th birthdays."

 

[Marc]

For my entire career I had both 401(a) and 403(b). Like was stated the 401(a) involved mandatory funds. The big advantage was that it didn't count against the max limit on 403(b) contributions. After retirement, the 401(a) has one distinction, if I withdraw funds from it I cannot go back to work for six months. This year I rolled over the 403(b) to my non-workplace Fidelity rollover IRA (getting the $2,500 bonus). Next year I will roll over the 401(a) figuring that after three years I am definitely not going back to work (and to get another $2,500 bonus).

Marc

 

[GenXguy]

I've had 457B and 401a options for about 20 years. I wasn't maxing out the 457B and the only contributions going to the 401a were the employer contributions.


I eventually maxed out the 457B and was able to add to the 401a at that point as well.


The limit on the 401a alone is $56,000 for 2019, including my employer's contributions in that limit, but that's high enough, I still don't max the 401a.



My 457B with 50+ catchup and 401a limits combined total $81,000, a limit I'm not going to reach.