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403(b) vs. Roth IRA

There are many different ways to save for retirement. Roth IRAs and 403(b)s are among the more popular account types; the former has strong after-tax perks and is available to most savers below certain income limits, while the latter is reserved for public and nonprofit workers. So if you have both available to you, where should you put your money?

What Is a 403(b)?

A 403(b) plan is also known as a tax-sheltered annuity, or TSA, plan. They tend to be offered by public schools and some nonprofits. For reference, the private company equivalent of a 403(b) is a 401(k) plan.

For the most part, 403(b)s still allow you to contribute to a retirement plan and, depending on your employer, they may contribute to it as well. You might be eligible for one if you work for:

  • A public school
  • A state college or university
  • A church
  • A school within an Indian tribal government

Some self-employed ministers may also qualify.

Your contributions and earnings from a 403(b) are pre-tax, which means any income you defer into the account won’t be subject to income tax. You also won’t have to worry about paying taxes on dividends or capital gains as the invested money grows. In fact, you won’t pay taxes until you start making eligible distributions from your 403(b) plan, which comes when you turn 59.5 years old.

Contributions limits for a 403(b) plan are similar to a traditional 401(k) account. For the 2019 tax year, you can contribute up to $19,000. If you’re 50 years of age or older, you can make an additional $6,000 in catch-up contributions.

Depending on the plan your employer chooses, a 403(b) plan can be invested in one of a few different ways:

  • An annuity contract through an insurance company
  • A custodial account that invests in mutual funds
  • A specific retirement income account set up for church employees

Don’t fret if you end up leaving your job that provides your 403(b) plan. Should this happen, you can roll it over to another retirement account. If you want, you can open an IRA, a Roth IRA or a 401(k), if your new job offers it.

What Is a Roth IRA?

403(b) vs. Roth IRA

A Roth IRA is a kind of individual retirement account (“IRA”). While contributions to a traditional IRA are tax deductible, Roth IRA contributions do not allow you to lower your taxable income. But when you reach retirement, your Roth IRA withdrawals will be tax-free (unlike traditional IRA withdrawals, which are are taxed as ordinary income when you take them out in retirement). So the major perk of a Roth IRA is that you’re helping your future self by avoiding a bigger tax burden down the road.

Roth IRAs are similar to other IRAs, in that you can have one without needing your employer to set one up. Since they’re individual accounts, they stay with you as you move jobs without the need for rollovers. IRAs can be set up at banks or other financial institutions.

Another benefit of a Roth IRA is that there’s no age limit for contributing to one. With traditional IRAs, you must stop making contributions by the time you hit 70.5 years of age. With Roth IRAs, you can continue to make contributions for as long as you’d like. And you don’t have to take required minimum distributions (RMDs) like you do with a traditional IRA. That means if you’re not ready to make withdrawals, you don’t have to.

Contribution limits for IRAs are much lower compared to a 403(b). More specifically, in tax year 2019, you can only contribute $6,000, plus an extra $1,000 in catch-up contributions.

403(b) vs. Roth IRA: Major Differences

There are many differentiating factors between Roth IRAs and 403(b)s. Perhaps the most significant of these are their respective contribution limits. If you have a choice between these accounts, here are some comparisons to pay attention to:

403(b) vs. Roth IRA
Details 403(b) Account Roth IRA
Contribution limit for 2019 $19,000 $6,000
Catch-up contribution limit for 2019 $6,000 $1,000
Who can open one? A public sector or nonprofit employee, like a teacher or minister Single filers making $122,000 to $137,000 and couples filing jointly making $193,000 to $203,000
Can your employer contribute? Yes No
Is there an RMD? Yes, 70.5 years of age No
Can you keep it forever? As long as your employer offers it and you stay with that job Yes, regardless of employer or job status

Which Should You Open?

403(b) vs. Roth IRA

If you qualify for both a Roth IRA and a 403(b), which should you choose?

For many, the answer is “both” – you can absolutely contribute to both a 403(b) and a Roth IRA at the same time. But if you have limited funds and can only contribute money to one account, then your choice depends on a few factors.

The first thing to consider is employer matching. As with a 401(k), an employer may choose to match some of their employees’ contributions to a 403(b). This is free money, so if your employer offers matching, make sure you contribute whatever it takes to your 403(b) to max out this benefit.

Beyond that, consider taxes: Do you expect your tax rate to be higher now or in retirement? If your tax rate is relatively low right now, you may be better off with a Roth, which taxes contributions at your current income tax rate but lets you withdraw tax-free. Contributing early in life is also advantageous because your contributions have more time to grow tax-free. If, on the other hand, you expect to have a lower tax rate in retirement than you do now, then you may be better off with a tax-deferred vehicle like a 403(b).

Another factor to keep in mind is your investment options. A 403(b) will have a limited “menu” of investments to choose from – usually a collection of target-date funds and other mutual funds. On the other hand, opening an individual retirement account at a brokerage gives you access to a wide variety of options, from sector ETFs to low-cost index funds to individual stocks and bonds. If the investment options at your employer’s 403(b) seem limited, then an IRA might be better for you.

A final note: Just as Roth IRAs also come in a traditional (tax-deferred) variety, so too can a 403(b) come in a Roth variety. So if you like the simplicity and high contribution limit of a 403(b), but want to pay taxes now and enjoy tax-free distributions in retirement, look into a Roth 403(b). And if you want more retirement options but still want to take a tax-deduction, go with a traditional IRA instead of a Roth IRA.

Whatever you choose, the important thing is that you’re saving money, investing it in the market, and getting some kind of tax advantage. Having any retirement plan is better than not having one at all. Whether you have the chance to open a 403(b) plan, a Roth IRA or another retirement plan, try to find one that’s the best fit for you. In the end, you’ll be happy you have your retirement plans sufficiently in order.

Tips to Help You Get Ready for Retirement

  • If you’re unsure which plan is best for you, or you need help picking investments, you should work with a financial advisor. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
  • No matter which plan you choose, do your best to max out your contributions. The more money you save now, the more your future self will have when retirement comes around. When you’re young and earning a lower salary, it may be tough to max out your contributions, but the head-start can make a huge difference.
  • Don’t forget to add in Social Security payments when you calculate what your retirement income will look like. To get an idea of what you can expect to receive, stop by SmartAsset’s Social Security calculator.

Photo credit: ©iStock.com/shapecharge, ©iStock.com/designer491, ©iStock.com/oneinchpunch

Dori Zinn Dori Zinn has been covering personal finance for nearly a decade. Her writing has appeared in Wirecutter, Quartz, Bankrate, Credit Karma, Huffington Post and other publications. She previously worked as a staff writer at Student Loan Hero. Zinn is a past president of the Florida chapter of the Society of Professional Journalists and won the national organization's "Chapter of the Year" award two years in a row while she was head of the chapter. She graduated with a bachelor's degree from Florida Atlantic University and currently lives in South Florida.
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