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A Roth IRA vs 403b

A Roth IRA vs. a 403b... Which one is best for you?

It depends, of course, on your current financial position and personal retirement goals.

Whether you choose to invest in a Roth IRA, a 403b, or both, you need to ask yourself, "Does the plan feature..."

  • Tax Deductible Contributions?
  • Tax Deferred Investment Gains?
  • A Maximum Income Limit for Contributions?
  • Taxation of Withdrawals?
  • Early Withdrawal Penalties?
  • Required Withdrawals?
  • Investment Options?

You need to take each of the above factors into account when comparing a Roth IRA vs. a 403b.

To determine which one is best for you, let's examine each factor individually.

Tax Deductible Contributions

In a Roth IRA vs. 403b contest, the 403b is the champ when it comes to tax deductible contributions.


Because Roth IRA contributions are NOT tax deductible.

403b contributions, on the other hand, ARE tax deductible.

So why does this matter?

Well, tax deductible contributions can save you a good amount of money on your current tax returns. They might even lower your taxable income to the point that you end up in a lower tax bracket, saving you even more money!

So tax deductible contributions can be rather advantageous.

However, dollar for dollar, tax deductible contributions aren't the bargain they appear to be.


Because the flip side of those tax deductible contributions is that you're going to end up paying income taxes on your 403b withdrawals once you reach retirement age.

Your Roth IRA?

Tax-free. Once you make a contribution with after-tax dollars, you never pay taxes again.

So all things being equal, a $5,000 contribution to your Roth IRA is worth a lot more in retirement than a $5,000 contribution to your 403b, because the former is tax-free and the latter is taxed.

So why contribute to a 403b?

Well, first of all, the two options aren't mutually exclusive. You can fund both accounts.

Also, when it comes to your 403b, you can contribute more!

That's right. The current Roth IRA contribution limit is $5,000 per year if you're under the age of 50. For a 403b, it's $15,500... more than triple the Roth amount!

Even better, your employer can opt to kick in additional funds... up to $30,500 in additional funds!

If you're lucky enough to have this option at your disposal, that's $46,000 per year you can save for retirement!

Of course, this is the ideal situation, but you get the point... a 403b can be an excellent vehicle for retirement savings.

Tax Deferred Investment Gains

Both a Roth IRA and a 403b feature tax-deferred investment gains. So, as is the case with a Traditional IRA and a 401k, neither account has an advantage over the other when it comes to growing your money tax-free...

So why does this matter... What's a tax deferred investment gain anyway?

Tax deferred simply means that taxes are put off until a later date.

So in the case of a 403b, you can invest and grow your savings without having to pay taxes on your investment gains until sometime in the future... in this case, when you withdraw funds for retirement.

Technically, a Roth IRA isn't tax deferred, because you don't pay taxes on qualified withdrawals during retirement.

But the net effect is the same, contribute money to a Roth IRA or a 403b, and you can invest and grow that money free of income taxes and capital gains taxes until you reach retirement age.

The Maximum Income Limit For Contributions

When listing the pros and cons of a Roth IRA vs. a 403b, which one offers the most flexibility in terms of limiting the contributions of high income earners?

The answer...

A 403b.

Currently, you can contribute up to $15,500 per year to your 403b regardless of the amount of income you earn (assuming you earn at least $15,500 per year).

But this isn't the case with a Roth IRA. Individuals who are single and earn $120,000 per year or more and individuals who are married and earn $176,000 per year or more can't contribute anything to a Roth.

So if your income exceeds these thresholds, you shouldn't have much of a problem deciding on a 403b over a Roth IRA...

Taxation of Withdrawals

When comparing a 403b to a Roth IRA, the Roth has one significant advantage...

Tax-free withdrawals.

Once you reach age 59 ½, all qualified withdrawals from a Roth IRA are tax-free.

The same withdrawals taken from a 403b?

They're subject to income taxes, just like a 401k or a Traditional IRA.

Think this is a minor point?

Think again...

Let's say you prudently invest in both a Roth IRA and a 403b for thirty years. At the end of those thirty years, you have...

$1,200,000 in your 403b, and...

$950,000 in your Roth IRA.

Assuming a tax rate of only 25%, the after-tax withdrawal value of those accounts is...

$900,000 for your 403b, and...

$950,000 in your Roth IRA.

Tax-free withdrawals can be a tremendous benefit in retirement. Imagine if your future tax rate is 35%. Or 45%. What if it's 50%?

See now why the Roth IRA is preferable when it comes to taxes and your retirement withdrawals?

Early Withdrawal Penalties

A Roth IRA versus a 403b... Which is better when it comes to early withdrawal penalties?

The answer?


Both a Roth IRA and a 403b are subject to a 10% penalty plus income taxes on non-qualified early withdrawals.

Although, keep in mind that original Roth IRA contributions are tax-free and penalty-free, so when making an early withdrawal from a Roth IRA, the 10% penalty and income tax liability only apply to the investment gains from your Roth IRA.

In a sense, this ability to withdraw initial contributions without penalty gives a Roth IRA a slight advantage over a 403b.

Required Withdrawals

When comparing the benefits of a 403b vs. a Roth IRA, which option is better when it comes to required withdrawals?

Since a 403b requires minimum distributions to begin at age 70 ½, the Roth IRA gives you far more flexibility in this respect.

With a Roth IRA, you aren't required to start making distributions (withdrawals) from your account at any given age. In fact, you can keep making contributions well into your 80's or 90's if you want!

All right, you say.

So what?

So a Roth IRA doesn't force you to make distributions at age 70 ½. What's the difference?

Here's the difference...

If you don't need the money in your 403b, the law forces you to withdraw at least a portion of it. You then have to pay taxes on that money and reinvest it in a taxable account. So that money can longer grow tax free...

But a Roth IRA?

At age 70 ½, if you don't need the money in your Roth IRA, you can just leave it there. You don't take a tax hit, and that money continues to grow tax-free until the day that you DO need it.

Doesn't that sound like a better deal?

Investment Options

Analyzing a Roth IRA versus a 403b, which one offers the widest variety of investment options?

The answer here is easy...

A Roth IRA.

How can I be so sure?

Just look at your Roth IRA investment options... Pretty much anything you want. Individual stocks, bonds, mutual funds, ETFs, etc.

But a 403b?

Your options are severely limited.

403b investment options are usually limited to traditional annuities, variable annuities, and mutual funds. And even then, you aren't necessarily free to choose your best option. Your options may be limited by the structure of your employer's plan and the participating investment companies involved.

As a general rule, you want to go with the lowest cost option available, preferably a low cost index fund.

But if you're looking for the flexibility to control your own investments, a Roth IRA is a far better choice than a 403b.


So in comparing the Roth IRA versus the 403b, which one is the best?

It really depends on your personal financial goals.

But in the end, it's not really a dilemma.


Because you can fund both!

There's no law which says you can't have a fully funded Roth IRA and a fully funded 403b.

That said, what if you don't have the means or the willingness to fund both?

In that case, you need to examine each of the aforementioned factors a little bit closer. Find out what's most important to you. Figure out which plan is best for meeting your retirement goals. Is tax deductibility in the current year more important to you than tax-free withdrawals once you retire?

Find out the answer.

Make a plan, and stick with your plan. Contribute as much as possible to your retirement and you'll be very glad down the road!

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