What Is the Difference Between 401(a) and 457 Retirement Plans?

Many employers in the U.S. establish 401(a) retirement plans for employees whereas 457(b) retirement plans are only available to people who work for state governments, municipal governments and some tax exempt organizations. The Internal Revenue Service affords the same tax-deferred status to these plans as it does to pensions and 401(k) accounts.

Establishing Accounts

Employers create 401(a) accounts on behalf of employees and decide how much employers can contribute, whether to contribute on the employees' behalf and whether the accounts are funded with pre-tax or after-tax earnings. Some 401(a) plans have mandatory contributions that specify exactly how much employees must invest in the plan. Government entities administer 457(b) plans for employees and all contributions are made on a pre-tax basis. 457(b) plans are designed to supplement other retirement income rather than provide the bulk of it. Employers do not have to allow all employees to have access to the plan.

Contribution Limits

As of 2011, participants in 457(b) plans can make annual contributions of the lesser of 100 percent of their gross salary, or $16,500, into the plans. People over the age of 50 can make contributions of up to $22,000. Contributions to 401(a) plans cannot exceed the lesser of 100 percent of an employee's annual salary, or $49,000. The contribution limits includes contributions made to the account by both the employer and the employee.

Tax Deferral

Money invested in 401(a) and 457(b) plans grows tax deferred which allows it to grow faster assuming the underlying investments perform well. The IRS assesses ordinary income tax on withdrawals made from the accounts. Participants who have 401(a) accounts funded with after-tax money only pay tax on the earnings and not the principal. People under the age of 59 1/2 who make withdrawals from 401(a) plans must pay a 10 percent penalty as well as income tax. 457 plan participants do not have to pay the 10 percent penalty for early withdrawals.

Withdrawals

Plan participants of 401(a) plans who leave employment can roll funds into individual retirement accounts, or 401(k) accounts, at other employers. People who hold the funds until retirement must withdraw the money as a lump sum, roll it into an IRA or an annuity. The IRS does not allow people to leave the funds in the account and take periodic withdrawals. People with 457(b) plans who change jobs can roll funds into other 457(b) plans or IRAs. At retirement, the plan administrator may allow participants to take money out incrementally but many people rollover the lump sum to an IRA or annuity.

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