LAST REVIEWED Apr 23 2020 8 MIN READ
By The Human Interest Team
Roth IRA and 403(b) plans are both important tools used in retirement planning. A Roth IRA is a retirement plan that you elect to do on your own, and it is something that can be used by anyone. On the other hand, a 403(b) plan is more like a 401(k) in that it is offered by certain employers. Only nonprofit organizations, public school systems, and some hospitals and churches can legally have a 403(b) as their official retirement plan.
The differences between 403(b) and Roth IRA
Some of the major differences between a 403(b) and a Roth IRA tend to center around taxes. When you contribute to a Roth IRA, it’s considered an after-tax contribution. This is because you’re essentially making a deposit from your own pocket and is believed to have already been taxed under existing IRS income tax guidelines. So, what you accumulate in a Roth IRA is tax-free and any withdrawals from it would also be tax-free during your retirement. Once your account reaches its fifth-year anniversary, you also have the option for tax-free withdrawals.
When you have a 403(b) plan, it is through your employer, while the Roth IRA is something you can set up yourself and is held with a brokerage. You won’t need to transfer management of a Roth IRA if you change jobs. If you leave your job where the 403(b) is held, the account might remain open, but most people transfer funds to keep things consolidated.
Unlike most 403(b) plans, Roth IRAs do not have an employer willing to match benefits. That means all the money contributed to your IRA is your own.
Per 2020 guidelines, employees can only contribute a maximum of $19,500 to their 403(b). If you are over 50 years old, you have the ability to contribute another $6,500 as a “catch-up” allowance, making the total $26,000. Factoring in the employer matching benefits, the total becomes $58,000.
What to know about starting a Roth IRA and 403(b)
When you join your employer’s 403(b), your options will depend on the plan in place. There are several different ways you can invest in a 403(b), including:
A custodial account that invests in mutual funds.
An annuity contract that is placed through an insurance company.
Certain retirement income accounts that are in place for church employees.
403(b) plans are subject to maximum contribution limits, which will continue to increase on an annual basis due to changes in the cost of living.
To open a Roth IRA, you can visit almost any large brokerage in the United States. Popular options include E-Trade, Charles Schwab, TD Ameritrade, and Vanguard. Roth IRAs are also subject to contribution limits. For 2020, individuals are allowed to contribute up to $6,000. If you are 50 or older, you have the right to contribute another $1,000 in catch-up funds.
Advantages of 403(b) plans
403(b) plans, just like 401(k) plans, offer a great deal of value to employees of an organization, including the opportunity to save money and receive additional pay through employer matching benefits. This is when an employer matches your contribution amount up to a specific dollar amount. In addition to employer matching benefits, some 403(b) plans may have special loans, account options, and even different provisions that may allow you to access your cash easier.
Any growth of assets in your 403(b) is tax-deferred. All your dividends, capital gains, and interest will accumulate tax-free until you go to withdraw any of it. You’ll start paying taxes once you make an eligible distribution from your 403(b), which won’t happen until you turn 59 1/2 years old.
Advantages of Roth IRAs
One major advantage with a Roth IRA is that there is no age limit for contributions. When you have a traditional IRA, you are not allowed to make contributions once you hit 70 1/2 years old. With the Roth IRA, you can make contributions for as long as you want, and you are not forced to take Required Minimum Distributions (RMDs). RMDs are required with a traditional IRA.
What to consider when choosing between a Roth IRA and 403(b)
If you are looking to have a lower tax rate at the time of retirement, then you might be better off with a 403(b) plan. 403(b)s only have a limited range of investment options to choose from, including target-date funds and some mutual funds. With a Roth IRA, you can open an individual retirement account through a brokerage, which will give you access to a wider variety of investment options, including low-cost index funds and sector ETFs to individual stocks and bonds.
If you are considering a Roth IRA, it’s best to open one sooner rather than later so you can take advantage of the withdrawal benefits that become active once your account reaches its fifth anniversary. Once you open a Roth IRA, you can then contribute as much as you want each year within the maximum contribution limits.
Many people find that it’s beneficial to have both types of retirement accounts. If you consider multiple accounts, you should make sure that you prioritize allocating funds. For example, if you are doing both a 403(b) and a Roth IRA, it’s beneficial to max out your contributions under the 403(b) and then start contributing to your Roth IRA.
Whichever option you decide is a good one as long as you decide something. It’s important to save money, get some type of tax advantage, and invest in the market. Any type of retirement plan is better than having none at all.
Get help with 403(b) plans
Are you an organization that is qualified to have a 403(b) plan? At Human Interest, we help businesses and organizations implement 401(k) or 403(b) plans. Contact us today and let us help you get the best retirement plan in place for your business or organization.
The Human Interest Team
We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment advising, and integration with leading payroll providers.