Roth 403b vs. Roth IRA: Key Differences

When Roth IRAs were introduced in 1998, they provided the opportunity to create tax-free income in retirement. A few years later, Roth 401(k) and Roth 403(b) accounts were created to allow company retirement accounts to provide tax-free income. When you’re saving for retirement, how do you choose between these accounts? In this article, we’re going to explain the key differences between Roth 403(b) and Roth IRAs so that you can decide which is best for you. Consider working with a financial advisor as you decide which kind of tax-advantaged retirement account is best for you.

What Is a Roth IRA?

Roth IRAs were created in 1998 as a way for investors to create tax-free income in retirement. Instead of getting an up-front tax break in the year that you contribute, you receive tax-free withdrawals in the future. You may contribute up to $7,000 in 2024 ($6,500 in 2023) per year in a Roth IRA. If you’re age 50 or older, you can contribute an extra $1,000, for a total of $8,000 ($7,500 in 2023) per year.

Because these tax-free benefits are so attractive, the ability to fully contribute to a Roth IRA is limited by your income. As a single taxpayer in 2024, your modified adjusted gross income (MAGI), must be below $146,000 ($138,000 in 2023). The option to contribute to a Roth IRA is phased out for high-income earners and is eliminated for those making $161,000 ($153,000 in 2023) or more. Income limits for investors who are married filing jointly are $230,000 and $240,000 ($218,000 and $228,000 in 2023), respectively.

Roth IRAs can invest in a wide variety of investments, just like a traditional IRA. You can open your Roth IRA with any brokerage that you choose, including those that offer self-directed IRAs. Most investors invest in stocks, bonds, mutual funds or ETFs within their Roth IRA.

Once your Roth IRA account has been open for at least five years, you can withdraw your contributions without penalty. However, any investment gains withdrawn before age 59.5 are subject to a 10% penalty and income taxes.

What Is a Roth 403(b)?

A 403(b) is an employer-sponsored retirement account for teachers, nonprofits and eligible employees of churches and hospitals. They are roughly equivalent to 401(k) accounts offered by many businesses. Similar to a 401(k), employees make payroll contributions to their 403(b) accounts. While some employers choose to make matching contributions, they are not required to do so.

Roth 403(b) accounts are the tax-free version of the traditional 403(b). Contributions are made with after-tax money so that all withdrawals in retirement are free from income taxes. Unlike Roth IRAs, your ability to contribute to a Roth 403(b) is not limited by your income.

The annual contribution limits for 403(b) accounts are $23,000 in 2024 ($22,500 in 2023). Investors age 50 and over can contribute an additional $7,500, for a total of $30,500 ($30,000 in 2023). These contribution limits are the total combined amount that you can contribute to traditional or Roth 403(b) accounts.

When you leave your job, you may leave the money in the 403(b) or roll it over into a Roth IRA. Many investors choose to roll it over so that they have greater control over their accounts and access to a wider array of investment options.

Key Differences Between the Roth 403(b) and Roth IRA

Both Roth IRAs and Roth 403(b) accounts provide tax-free income in retirement, but there are several key differences that you must understand before choosing one option over the other.

Ability to contribute: Not all employers offer a Roth option in their company-sponsored retirement plan. All investors have the option to contribute to a Roth IRA, as long as they meet the income requirements.
Contribution limits: You may contribute up to $7,000 per year in a Roth IRA compared with up to $23,000 in a 403(b) account. Investors age 50 and older may use “catch-up contributions” to contribute up to $7,500 in a Roth IRA and $30,500 in a 403(b).
Income limitations: The ability to contribute to a Roth IRA is based on your taxable income. To contribute fully, your modified adjusted gross income (MAGI) must be under $146,000 as a single filer ($230,000 for married filing jointly). There are no income limitations when contributing to a Roth 403(b).
Investment choices: When you contribute to a Roth 403(b), your investment choices are limited to the available plan options. Under the 403(b) rules, options are limited to mutual funds and annuities. With a Roth IRA, the investment options are far greater. You can invest in almost anything – ranging from the usual stocks, bonds, mutual funds and ETFs to more exotic alternative investments through a self-directed IRA.
Employer contributions: A Roth IRA is an individual account and does not receive a matching contribution from your employer. Matching contributions are not required for a Roth 403(b), but many employers do as part of an employee benefits package.
Early retirement: A 403(b) investor can avoid 10% early withdrawal penalties if they separate from service on, or after, the year that they turn 55. Roth IRAs do not have this benefit.

Bottom Line

Investors looking for tax-free income in retirement may be able to contribute to a Roth IRA or Roth 403(b) account. Contributions are made with after-tax money today, but all withdrawals are tax-free in retirement. Roth 403(b) and Roth IRAs each have benefits that make them the right choice for different types of investors. Speaking with a financial advisor can help you decide which option (or possibly both) is best for your situation and retirement goals.

Retirement Tips

One of the ways to have more money for retirement is by taking advantage of tax laws to reduce how much you owe. Our retirement taxes calculator helps you understand how your income is affected based upon which state you live in.
Tax-free income from Roth 403(b) and Roth IRAs are just two of the options you have available. Working with a financial advisor can help you maximize the benefits of tax-advantaged accounts. Finding a financial advisor doesn’t have to 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.