403b vs Roth IRA — one of the biggest debates in retirement savings. Both have their advantages and disadvantages, but which one should you opt for?
Here’s a quick rundown of the basics to help you decide!
What Is Roth IRA
A Roth IRA is a retirement account for individuals that is not only tax-free but also comes with tax-free withdrawals during retirement. In other words, you won’t get a tax deduction for your contributions as Roth IRA uses after-tax dollars. That said, all earnings and withdrawals are completely tax-free!
What Is a 403b Plan
A 403b plan is a retirement savings plan offered by many public schools and non-profit organizations. Employees can deduct a portion of their paycheck and deposit it into their 403b account.
Like a 401(k), 403bs offer tax-deferred growth and employer matching contributions in some cases.
Roth IRA vs 403b: Key Differences
Given that 44% of non-retirees believe their retirement plan is off-course, to get a clearer picture of what each plan offers, let’s take a look at the table:
|Who Can Apply||Individuals||Public employees and non-profit organizations|
|Contribution||Based on income||Employer plans only|
|Income Tax||Tax-Free Income||Taxable Income|
|Wealth Tax||Tax-Free Growth||Tax-Deferred Growth|
To decide which one is better for you, 403b or Roth IRA, you must consider the following factors:
Who Can Apply
The main difference between Roth IRAs and 403(b) plans is accessibility. For example, 403(b) plans are only available through certain employers. You can only contribute to a 403(b) if your employer is a public school or a 501(c) organization.
On the other hand, Roth IRAs are available to anyone who earns qualifying income. This includes W-2 employees, self-employed individuals, and divorcees. However, you can’t contribute the following:
- Rent from rental properties
- Profit from selling a property
- Dividends or interest earned from investments
- Income generated from retirement plans
Nevertheless, if you’re self-employed or have multiple jobs, you can open a Roth IRA even if you already have a 403b plan. This isn’t possible with a 403b plan — you can only participate in one 403b plan at a time.
403b plans have higher contribution limits than Roth IRAs. For 2022, you can contribute up to $20,500 to a 403b plan (403b and Roth max contribution in 2021 is $19,500 and $6,000, respectively).
Plus, employees over 50 can make extra contributions of $6,500. This is in addition to the regular limit on elective deferrals.
With a Roth IRA, the contribution limit is $6,000 (or $ $7,000 if you’re 50 or older).
You might be limited in the amount of money you can put into a Roth IRA account, depending on your filing status and income.
There are no income limits for contributing to a 403b plan. However, there are income limits for contributing to a Roth IRA. If your Adjusted Gross Income (AGI) is over $144,000 (or $214,000 if you’re married), you can’t contribute.
Another difference between Roth and 403b is the employer matching contributions. Namely, 403b plans usually have employer matching contributions, whereas Roth IRAs do not.
Employer matching contributions are a bonus to 403b plans and can quickly help you reach your retirement savings goals.
403b plans usually have more investment options than Roth IRAs. 403b plans can offer a variety of mutual funds, annuities, and even life insurance products. Roth IRAs are limited to investments in stocks, bonds, and mutual funds.
403b plans offer tax-deferred growth, whereas Roth IRAs offer tax-free growth. With a 403b plan, you don’t pay taxes on your contributions or investment earnings until you withdraw the money in retirement.
You pay taxes on the money you contribute now with a Roth IRA, but all future withdrawals are tax-free.
Is an IRA better than a 403b when it comes to loans? In this case, no, because Roth IRAs don’t allow loans.
Conversely, you can borrow money from your account with some 403(b) plans. If your employer offers a loan option, you may be able to borrow $50,000 of the money you have saved or 50% (whichever is less).
Fees and Expenses
403b plans often have higher fees and expenses than Roth IRAs. Financial institutions manage 403b plans, while Roth IRAs are self-managed. Financial institutions typically charge higher fees for their services.
What are the disadvantages of a 403b? That would be withdrawal fees. The 403b has some restrictions on when you can withdraw funds. You must be at least 59½ years old, or you’ll be subject to a 10% early withdrawal fee.
You can also take money out of your 403b plan if:
- You lose your job
- Become disabled
- Experience a financial hardship
The Roth IRA has no such restriction. You can withdraw your money at any time. This is one of the biggest advantages of the Roth IRA over the 403b.
However, you can only take the money out of a Roth IRA if you’re older than 59½ and have had the account for at least five years. If you take the money out earlier, you will have to pay taxes and a 10% penalty.
There are some exceptions, like if you are buying your first home, going to college, or having expenses related to a birth or adoption.
Is It Better to Do a 403B or Roth IRA Contribution?
There are other differences between 403b plans and Roth IRAs that you should consider when deciding which investment plan is best for you. 403b plans can be better if you are employed by a non-profit organization, while Roth IRAs have no restrictions.
You may also want to consider how much you can contribute to each type of account. 403b plans have higher contribution limits than Roth IRAs, so if you’re looking to invest more money for retirement, a 403b plan might be the way to go.
Finally, it’s important to remember that 403b plans are subject to income taxes, while Roth IRA contributions are not. When you withdraw money from your 403b during retirement, you’ll owe taxes on the withdrawals.
With a Roth IRA, you can take out your contributions tax-free, and you won’t owe taxes on the earnings when you retire.
So, is there a winner in this Roth IRA vs 403b showdown? Which one is better? It depends on your circumstances. If you’re eligible for a 403b plan and your employer offers matching contributions, that might be the best option. However, if you’re self-employed or have multiple jobs, a Roth IRA might be better.
Ultimately, it’s up to you to decide which plan is best for you. But hopefully, this overview has given you some food for thought as you decide.
Is Roth 403b same as Roth IRA?
No, the Roth 403b is different from a Roth IRA. The Roth 403b account is like the traditional 403b, but without taxes on the money you take out.
Moreover, Roth 403b contributions are not limited by your income, unlike Roth IRAs.
Roth 403b contributions are subject to required minimum distributions. That means you will have to take some of the money out at a certain point, no matter what. This is not the case with Roth IRAs.
How much should I contribute to my Roth 403(b) account?
If you’re younger than 50, you can contribute a maximum of $20,500. People over 50 can contribute even more, i.e., $27,000 due to the additional catch-up contribution of $6,500.
The IRS has rules that give more flexibility for catch-up contributions for people who have worked for their employer for at least 15 years and have a 403(b) plan. If you are younger than 50, you can contribute an extra $3,000 per year.
The lifetime cap on this contribution is $15,000.
403b vs Roth IRA for teachers — which one is better?
The 403b plan is a better option for teachers because it lets you have money deducted from your paycheck and put into pre-determined investments.
Moreover, your contributions and earnings to the 403b plan are tax-deductible and tax-deferred.
If your employer offers a matching contribution to your 403b plan, it’s good to take advantage of it.
For example, if your employer matches half of the money you put into your retirement account — up to 6% of your salary — and you make $75,000 a year and contribute 6% of your salary to the account, then your employer would add $2,250 to your retirement savings.
So, the former wins in this 403b vs Roth IRA debate.