401a vs 457b: Retirement Savings Options Compared

If you're a government employee, you're likely familiar with the 457b plan, but did you know that a 401a plan is also available to you?

The 401a plan is a defined benefit plan, which means it provides a guaranteed benefit amount at retirement. This is in contrast to the 457b plan, which is a defined contribution plan that relies on the performance of the investments.

One key benefit of the 401a plan is that it offers a higher potential return on investment, with some plans offering returns of up to 7-8%. In contrast, the 457b plan typically offers returns of around 4-5%.

The 401(a) and 457(b) plans are two types of retirement plans commonly offered to government and non-profit employees. They share some similarities, but also have some key differences.

Mostly government and non-profit employees are eligible for 457(b) plans, while government, educational, and non-profit employees are eligible for 401(a) plans. 457(b) plans have a contribution limit of $23,000 in 2024, with additional catch-up contributions allowed.

Employer contributions are allowed in 457(b) plans, but count towards the contribution limit, whereas in 401(a) plans, employer contributions are typically mandatory and match a certain percentage of employee contributions. You can contribute to a 457(b) plan pre-tax or after-tax (Roth), but the method is predetermined by the employer.

One key difference between the two plans is the withdrawal penalty. There is no early withdrawal penalty for 457(b) plans, but a 10% penalty applies to 401(a) plans with certain exceptions. Required Minimum Distributions (RMDs) begin at age 73 for both plans.

Both plans allow loans, but you can withdraw funds from a 457(b) plan if no longer employed by the organization, regardless of age, whereas a 401(a) plan requires you to be at least 55 years old.

Here's a comparison chart to help you quickly see the differences:

A 401(a) plan is a type of retirement savings plan primarily used by government entities, educational institutions, and non-profit organizations.

The employer typically determines the specifics of a 401(a) plan, including eligibility, contribution limits, investment choices, and whether the plan will allow for pre-tax, after-tax, or both types of contributions.

Mandatory employer and/or employee contributions are common in 401(a) plans, where an employer can make it compulsory for employees to contribute a certain percentage of their pay to the plan.

Employers usually contribute to the plan as well, often in the form of matching contributions.

A vesting schedule is often included in 401(a) plans, which dictates how long an employee must work for the employer before gaining full ownership of the employer-contributed funds.

Tax-deferred growth is a benefit of 401(a) plans, allowing contributions and earnings to grow without being taxed until withdrawal at retirement.

Reduced taxable income is another advantage, as contributions are often made pre-tax, providing an immediate tax benefit.

Some 401(a) plans may allow for Roth contributions, where you contribute after-tax dollars, but the funds grow tax-free and withdrawals in retirement are also tax-free.

Loan provisions are also available in some 401(a) plans, allowing you to take out loans against your retirement savings in case of financial need.

If you have access to both a 401(a) and a 457(b) plan, you can contribute to both, with separate contribution limits for each plan.

As of 2023, the individual contribution limit is $23,000 for both 401(a) and 457(b) plans, with a catch-up contribution limit of $7,500 for each plan if you're 50 or older.

Here's a comparison of the contribution limits for 401(a) and 457(b) plans:

$76,500 total with 401(a) Catch-Up

Contribution limits for 401(a) and 457(b) plans are separate, allowing you to save even more for retirement. As of 2024, the basic annual limit for contributions to both plans is $23,000 for individuals under 50. This limit includes all contributions made by the individual to the plan, but does not count any employer contributions in the case of the 401(a) plan.

Catch-up contributions allow individuals aged 50 and over to contribute additional amounts to their retirement plans. For both 401(a) and 457(b) plans, the catch-up contribution limit in 2024 is an additional $7,500, raising the total annual contribution limit for those 50 and older to $30,000. You can also contribute to a 401(a) if you have access to both a 401(a) and a 457(b) plan.

Here's a comparison of the contribution limits for 401(a) and 457(b) plans:

$76,500 total with 401(a) Catch-Up

With a 457(b) plan, you'll have access to a range of investment options to diversify your portfolio and align with your risk tolerance and retirement goals.

Investment options within a 457(b) plan can vary, but they often include a variety of asset classes to create a diversified portfolio.

Mutual Funds are pooled investment vehicles that allow you to invest in a diversified portfolio of stocks, bonds, or other securities, managed by professional fund managers.

Target-Date Funds automatically adjust their asset allocation over time to become more conservative as the target retirement date approaches, providing a simple, all-in-one investment strategy for retirement savings.

Bond Funds invest primarily in bonds and other debt securities, making them a good option for conservative investors seeking steady income and lower risk.

Stock or Equity Funds invest in stocks and can be a good option for those seeking growth, although they can be riskier than bond funds.

Here are some common types of investments available in a 457(b) plan:

Investing always involves risk, including the risk of loss. Diversifying your investments and periodically rebalancing your portfolio can help manage risk.

The annual contribution limit for 401(a) and 457(b) plans is $23,000 for individuals under 50, with a catch-up contribution limit of $7,500 for those 50 and older, bringing the total limit to $30,000.

Catch-up contributions allow individuals to contribute more to their retirement plans, but there are limits. For 457(b) plans, individuals within three years of normal retirement age can contribute double the normal limit, up to $46,000 in 2024.

Employer contributions in a 401(a) plan do not affect your ability to contribute the maximum amount to your 457(b) plan, and vice versa.

If you have access to both a 401(a) and a 457(b) plan, you can contribute to both, with separate contribution limits. For 2023, the individual contribution limit is $23,000 for both plans, and if you're 50 or older, you can make catch-up contributions of an additional $7,500 to each plan.

Here's a comparison of the maximum annual employee contributions for different plan combinations:

Note that if one of the plans you participate in is a 457(b), you can save the maximum amount in both the 457(b) and the other plan. However, if you participate in a 401(k) and a 403(b), you can only save $23,000 total between the two.

Contributions to 457(b) plans are made on a pre-tax basis, reducing the current taxable income of the employee. The funds in the account, including any investment earnings, are not taxed until they are withdrawn.

The 457(b) plan has a unique feature of not having a 10% early withdrawal penalty, unlike other deferred compensation plans like 401(k)s or 401(a)s. Required minimum distributions (RMDs) generally must begin at age 73, ensuring that the IRS can eventually tax the deferred income.

The contribution limits for 401(a) and 457(b) plans are separate, allowing you to save even more for retirement.

The basic annual limit for contributions to both 401(a) and 457(b) plans is $23,000 for individuals under 50, as of 2024. This limit includes all contributions made by the individual to the plan, but does not count any employer contributions in the case of the 401(a) plan.

Catch-up contributions allow individuals aged 50 and over to contribute additional amounts to their retirement plans. For both 401(a) and 457(b) plans, the catch-up contribution limit in 2024 is an additional $7,500, raising the total annual contribution limit for those 50 and older to $30,000.

The 457(b) plan offers an additional special catch-up contribution for participants who are within three years of the plan's normal retirement age. They can contribute double the normal limit, a total of $46,000 in 2024.

You can contribute to both a 401(a) and a 457(b) plan, and the contribution limits for these two types of plans are separate. As of 2023, the individual contribution limit is $23,000 for both 401(a) and 457(b) plans.

Here's a summary of the contribution limits for different plans:

Note that the maximum annual plan contribution includes all money contributed to your account by both you and your employer.

If you're 50 or older, you can make catch-up contributions to your 401(a) and 457(b) plans. This allows you to contribute an additional $7,500 to each plan, raising the total possible contribution to $30,500 per plan in a single year.

The special catch-up contribution in a 457(b) plan is a unique provision that allows individuals within three years of normal retirement age to contribute up to $23,000 more than the standard limit. This can potentially double the amount you're able to save.

You can contribute to both a 401(a) and a 457(b) plan, with separate contribution limits for each. The individual contribution limit is $23,000 for both plans, and if you're 50 or older, you can make catch-up contributions of an additional $7,500 to each plan.

If you participate in a 401(k) and a 403(b), you can only save $23,000 total between the two plans. However, if one of the plans you participate in is a 457(b), you can save the maximum amount in both the 457(b) and the other plan.

Here's a breakdown of the catch-up contribution limits for 401(a) and 457(b) plans:

Note that these limits are subject to change, and it's always a good idea to review your plan documents and consult with a financial advisor to determine the best course of action for your individual situation.

Borrowing from your 457(b) plan can be a complex issue, but it's essential to understand the rules and limits involved.

You can borrow up to 50% of your vested account balance or $50,000, whichever is less, from your 457(b) plan.

The repayment period for a 457(b) loan is typically five years, although it can be longer if the loan is used to purchase a primary residence.

You'll need to repay the loan with interest, which is typically the prime rate plus 1-2%.

The interest you pay on the loan goes back into your 457(b) account, but be aware that you'll pay tax on the interest again when you withdraw the funds in retirement, leading to double taxation.

Defaulting on the loan can have consequences, but unlike other retirement plans, defaulted 457(b) loans aren't subject to the 10% early withdrawal penalty.

It's worth noting that borrowing from your 457(b) plan should generally be considered a last resort, as it can reduce your long-term retirement savings.