The 403(b) and Roth IRA are both retirement plans. They allow working class individuals to save funds that will generate profits over the years and be used after retirement. Both are different in several aspects, and entry requirements vary, too. However, an individual can opt for both if conditions are fulfilled. Let’s dive to find which one is best for you!
Major Differences Between 403(b) Vs Roth IRA
403(b) is offered to educational institutions, tax-exempt organizations, ministries, and churches. On the other hand, anyone can contribute to a Roth IRA. There is one limit, though; the annual income of a single individual must not increase by $153,000 per year. For married individuals with joint accounts, the limit is $228,000.
Sponsorship 403(b) Vs Roth IRA
Employer sponsorship is necessary for 403(b). Certain types of employers can offer 403(b) plans to employees. A Roth IRA is self-supported, and there is no requirement for employer sponsorship. Even teens with financial literacy who work after school start saving early in their retirement funds.
Contribution Rules 403(b) Vs Roth IRA
An employee’s maximum contribution for 403(b) is $23,000. It is important to note that the employer can also contribute to 403(b), which is separate from this contribution. The maximum in Roth IRA is $6500 annually, with $1,000 extra for account holders above 50.
Income Limits 403(b) Vs Roth IRA
The income limit rule is prominent in Roth IRAs, which specify that modified adjusted gross income (MAGI) must fall within a certain threshold. Otherwise, your contributions will be reduced.
On the other hand, 403(b) has no income limit, but one must be employed by an IRS Section 501(c)(3) tax-exempt organization, such as schools or churches.
Employer Contribution 403(b) Vs Roth IRA
A 403(b) might be better if you get an employer match or have more money to save beyond the $7,000 contribution limit for Roth IRAs. On the other hand, a Roth IRA has no such thing as an employer contribution but has more flexibility regarding investment choices.
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Tax Rules 403(b) Vs Roth IRA
Contributions to a traditional tax deferred 403(b) allow you to contribute before tax dollars and grow profits. However, retirement withdrawal is taxed, which you can adjust to fall into a lower tax bracket and get maximum benefits.
On the contrary, Roth IRA contributions are made only using taxed income. However, there is no tax on withdrawals and earnings (profits).
There is also Roth 403(b), where contributions are made using taxed income. The taxation in this plan is treated similarly to the Roth IRA.
Investment Options 403(b) Vs Roth IRA
Employees can generally invest their 403(b) contributions in annuities and mutual funds. On the other hand, Roth IRAs offer greater flexibility. You can invest in various financial vehicles, including stocks, bonds, index funds, mutual funds, and exchange-traded funds (ETFs). Therefore, in 403(b), the investment choices are more limited than Roth IRAs.
Required Minimum Distribution (RMD’s) In403(b) Vs Roth IRA:
This concept is applicable only in 403(b). RMDs are the rules for withdrawing income so that the IRS can take taxes on withdrawals. In tax deferred 403(b), distributions should start at 73 years of age. In a Roth IRA, no RMDs are required during your lifetime.
Withdrawal Rules 403(b) Vs Roth IRA
In a Roth IRA, you can withdraw contributions without tax or penalty. However, there is a 10% penalty on profits withdrawal before five years. On the contrary, you can’t withdraw from a 403(b) before age 59.5 years without facing a 10% penalty. Exceptions apply in certain circumstances, such as turning 55 and retiring from the employer sponsoring the plan. The risk is lower compared to 403(b).
There are certain exceptions that allow withdrawal without penalty, including:
- Separation from service if you’re age 55 or older (the “Rule of 55”)
- Disability
- Death
- Qualified higher education expenses
- First-time homebuyer
- Certain medical expenses
In a Roth IRA, once the five years are complete, you can also make qualified earnings distributions, and no penalty applies. There are limitations on rollover, though. You can easily rollover 403(b) to IRA. However, in the case of the Roth IRA, there are more tax implications.
What Should I Opt For Roth IRA Vs 403(b)
It is best to consult a financial advisor and provide detailed information about your employment, housing, family, and living expenses. There are other options too like 401(k). Compare each one and see which fits your goals. Check 403(b) vs 401(k) as well.
Still, we have devised certain traits that let you analyze which one, i.e., 403(b) or Roth IRA, suits you best. Roth IRA is suitable if you:
- have lower current incomes and expect higher incomes in retirement.
- want to minimize tax burden in retirement.
- want control over their investments.
- Want tax-free withdrawals in retirement.
- like higher after-tax returns over time.
- May need to withdraw after five years.
Go for 403(b) if you are:
- Employees of public schools, universities, or non-profit organizations.
- Individuals who want the benefit of employer matching contributions.
- Want to reduce current taxes and pay lower after retirement.
- Want a tax deferred growth.
Frequently Asked Questions
Who Is Eligible To Open Both Roth IRA and 403(b) Accounts?
Eligibility for 403(b) account holders are strict because they must be employees of public schools, universities, specific nonprofit organizations, or religious ministers. On the other hand, there is a maximum income limit for a Roth IRA. A person who can open 403(b) and has an income threshold per Roth IRA rules can open both accounts.
What are Contribution Limits In the Case of Both 403(b) and Roth IRA Accounts?
You can contribute to both 403(b) and Roth IRAs until the maximum contribution limit is reached. That means, in 2024, if you have both accounts, you can contribute $6500 for Rth IRA and $23,000 in 403(b). The catchup contributions are separate and can be contributed as well.
