Let’s take a look at 403(b) vs Roth IRA and find out which one is a better retirement plan.
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403(b) vs Roth IRA | Where Should You Put Your Money?
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Many people tend to confuse the different retirement options such as 403(b) vs Roth IRA. Both of these can help you grow your retirement income. Their variations, though, are far more significant. When you know all about the two options, you can decide better which one suits your retirement plan. Begin the process of choosing by knowing their definitions.
What Is a 403(b) Plan?
The 403(b) is an employer-sponsored retirement plan that is very similar to 401(k). The biggest difference lies in the people who can contribute to the account. The former is for non-profit organizations and public schools. It may also cover cooperative hospital service organizations, self-employed ministers, and tax-exempt organizations.
The 401(k) plan, on the other hand, is for a for-profit company that wishes to help employees save for retirement.
Another term for 403(b) is tax-sheltered annuity plan. It means you and your employer can make contributions to your retirement savings plan using pre-tax dollars. The only time you have to pay taxes is when you withdraw your contributions and/or earnings.
Regardless, 403(b) is very much alike a 401(k) plan:
- You don’t get to choose your plan. The employer does it for you.
- You can deduct your contributions to your taxable income on the tax year you made them.
- Your employer can match your contributions.
What Is a Roth IRA?
There are already many articles on Inside Your IRA that touch on Roth IRAs. As a recap, it is an individual retirement account. A Roth IRA can be funded using post-tax income. To qualify for this retirement plan, you need to meet certain requirements:
- income for the current year
- tax filing status
- earned taxable income
The last part is important since it’s one of the factors that set Roth IRA apart from Traditional IRA. The income limits are as follows:
You can contribute up to the maximum allowable amount of $5,500 ($6,500 if you’re at least 50 years old) if you’re earned income is less than $120,000. It begins to phase out once it reaches between $120,000 and $134,999. You can no longer contribute to Roth IRA if your income is $135,000 and above.
Married Filing Separately
You are ineligible for Roth IRA if your earned income is higher than $10,000. It begins to phase out between $1 and $9,999.
Married Filing Jointly
You can contribute up to $5,500 ($6,500 if you’re at least 50 years old) if the joint income is less than $189,000. It phases out from $189,000 to $198,999. You can no longer contribute if the earnings are $199,000 or more.
Note, though, you may consider doing Roth IRA conversions. Another name for this is a backdoor IRA.
If you are eligible to contribute, you need to meet essential Roth IRA rules to withdraw penalty- and tax-free. One of these is the five-year rule. This rule indicates that your account must be open for at least five years before you can make withdrawals.
403(b) vs Roth IRA | A Comparison
Now that you have a better idea on the differences between Roth IRA and 403(b), it’s time to compare them more closely:
There’s no doubt 403(b) plans allow you to contribute more money to your retirement. This tax-deferred annuity plan lets you fund your account up to $18,500. If you are at least 50 years old, you can add $6,000 as a catch-up contribution. This means you can set aside $24,500 a year.
That’s not all you can do with 403(b), however. If you’ve been in the service for 15 years, you have the option to add $3,000 to your yearly contribution limit. This means if you’re below 50 years old, you can contribute a maximum of $21,500.
The IRS, meanwhile, sets the maximum allowable contribution for Roth IRA at $5,500 per tax year, as of 2018. You can add $1,000 as a catch-up contribution if you’re at least 50 years old. If you are past that age, your maximum contribution can be as much as $27,000.
When it comes to 403(b) vs Roth IRA, which one should you pick concerning withdrawals? The answer is the latter for the simple reason that it’s more flexible.
Like Traditional IRA, a 403(b) plan forces you to take a required minimum distribution (RMD) by the time you reach 70.5 years old. Otherwise, the amount you didn’t withdraw will receive a hefty 50% tax. If you withdraw your money earlier than 59.5 years old, the distribution may be subject to a 10% penalty on top of the tax liability.
With Roth IRA, you can choose not to withdraw your funds. In fact, you can pass it on to your heirs or spouse upon death. There are also scenarios where you can withdraw before you reach 59.5 years old and not have to pay a tax penalty. These include hardship withdrawals.
A 403(b) may work for you if you want:
- higher contribution limits
- tax-free growth
- no income restrictions
A Roth IRA, on the other hand, has a lower contribution limit. It also has tax-free withdrawal, which a 403(b) lacks.
4. Investment Options
In a Roth IRA, you have a wide variety of investment options to choose from. You can even opt for a self-directed IRA. This can give you access to gold and real estate.
As for a 403(b) plan, participants cannot invest directly in individual stocks. They can, however, do so through mutual funds. It’s also not uncommon for companies to offer an annuity contract.
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To find out which is better between 403(b) and Roth IRA, check out the video below!
When it comes to 403(b) vs Roth IRA, it’s a matter of objectives. If you want flexibility with withdrawals and investment options, Roth IRA may be a better pick. If you are a high-income earner, 403(b) is more ideal. Roth IRA is better for those who want to have more investment options. Either way, when you’re having a hard time deciding, you can always get help from retirement experts.
Which do you think is better: 403(b) Plan or Roth IRA? Share your choice with us in the comments section below!
Editor’s Note: This post was originally published on October 10, 2017, and has been updated for quality and relevancy.