403b vs. IRA: Key Differences

In the process of saving for retirement, you’re likely to come across both 403(b) and IRA account options. While both of these can offer you similar benefits, there are some very important differences to note between the two accounts. Here’s a look at 403(b) vs. IRA accounts, and which makes the most sense for your own retirement planning. Deciding which type of tax-advantaged retirement account to open can be challenging, but a financial advisor can clarify your choices and help you make a good decision.

What Is a 403(b) Account?

A 403(b) is an employer-sponsored retirement savings account, sometimes also called a TSA (tax-sheltered annuity) plan. These retirement accounts are typically offered by non-profit employers, like churches or eligible hospitals and schools.

The 403(b) plan allows employees to make pre-tax contributions into their retirement savings account. Any earnings on those contributions will remain untaxed until they are distributed (withdrawn) from the plan. Employers may also contribute to a 403(b) plan for an employee — through a company match or similar arrangement — if they so choose.

For 2023, the maximum amount that an employee and employer (combined) can contribute to any single 403(b) account is $66,000 ($69,000 in 2024) or the employee’s total includible earnings during the most recent year, whichever is greater.

Employers can choose to invest the funds placed in a 403(b) account in one of three ways:

As an annuity contract, offered through an insurance company,
As a custodial account which is then invested in mutual funds,
Or as a retirement income account (for church employees only).

When it comes time to withdraw those funds, employees will need to wait until they reach age 59.5, experience a severance from their employed position, become disabled or encounter a qualifying financial hardship. Alternatively, an employee’s beneficiaries can withdraw from the fund if he or she passes away prior to reaching age 59.5.

What Is an IRA?

An IRA, or individual retirement account, is a similar type of retirement plan. Most IRAs offer tax-deferred retirement savings, which allows them to grow tax-free; instead, you’ll pay taxes on your IRA distributions in retirement. There are two primary types of IRA: traditional accounts and Roth IRAs.

Traditional IRAs can be held by banks, investment firms and brokerages, so there are many options for investing and growing your savings. You can contribute up to $6,500 (in 2023) annually toward all of your IRAs ($7,500 if you’re age 50+) or up to your maximum taxable income for the year, whichever is higher. These numbers increase to $7,000 and $8,000 in 2024.

As of 2023, you can contribute to your IRA at any age. However, you will need to begin taking required minimum distributions (RMDs) at age 73 starting in 2023 (up from age 72 in 2022) and 75 in 2033.

When to Choose a 403(b) vs. an IRA

When comparing 403(b) vs. IRA retirement savings accounts, here are four important things to keep in mind:

A 403(b) is only offered by certain employers, such as non-profit hospitals, schools or churches. If your employer doesn’t offer you a 403(b) account, you aren’t eligible to contribute to one.
An IRA can be opened for anyone, as long as they have qualifying earned income. Some IRAs are employer-sponsored — and employers may even fund them on behalf of their employees — but IRAs can be opened individually as well.
Contribution limits between the two accounts vary. A 403(b) allows employee contributions up to $22,500 in 2023 ($30,500 for those age 50 or older), while IRAs only allow up to $6,500 ($7,500 if you’re age 50 or older). These base numbers increase to $23,000 and $7,000 in 2024.
Both 403(b)s and IRAs grow tax-free, and earnings are typically only taxed at withdrawal.

Bottom Line

Your retirement savings strategy can involve several different accounts, two of which could be a 403(b) and an IRA. Both of these accounts allow for tax-deductible contributions and tax-free growth for employees with eligible income. A 403(b) – which is only available to employees of certain organizations – has higher annual contribution limits, while an IRA can offer a variety of options for tax and investment purposes.

Tips for Picking Your Retirement Accounts

A financial advisor can be an invaluable resource when developing a retirement savings strategy. Finding a financial advisor can be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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