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403(b) vs. Roth IRA: Which One is Better?

Last updated 02/02/2023 by

Lacey Stark

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Fact checked by

Summary:
A 403(b), also known as a tax-sheltered annuity, and a Roth individual retirement account (Roth IRA) are both important investment vehicles used to grow retirement savings. However, each retirement account has distinct rules, regulations, and requirements that investors need to be aware of. For example, both accounts have different tax advantages, contribution limitations, and withdrawal requirements. In addition, a Roth IRA is typically a personal retirement account, whereas a 403(b) is a retirement plan offered by certain types of employers.
Saving for retirement can feel like a daunting task, but it’s important for your future. And the earlier you start, the longer you have to let your retirement savings grow. But it can be tough to know where to start. Does your employer offer a retirement plan? If so, how does that work? If you can’t get an employer-sponsored plan, what are your other options?
We’ll answer these questions and more about the ins and outs of retirement planning. Read on to learn about Roth IRA and 403(b) retirement plans, their pros and cons, and whether it’s smart to have both a Roth IRA and a 403(b).

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403(b) vs. Roth IRA

There are compelling arguments for having either type of retirement account (or both). But first, let’s take a look at how each form of retirement savings is structured.

What is a 403(b)?

A 403(b) is a plan for retirement offered to employees by public schools, including state colleges and universities, non-profit or tax-exempt employers, and some churches. It’s very similar to 401(k) plans offered by private-sector employers in that your contributions are tax-deductible. This means contributing to your account lowers your effective income, giving you tax savings in the short term.
For example, if you make $4,000 a month before paying taxes and you’re in the 22% tax bracket, you would owe $880 in taxes. Instead, if you contributed $500 a month to your 403(b) retirement fund, that lowers your taxable income to $3,500 a month. As such, you would only owe $770 in taxes, a savings of $110.
The money you contribute is then invested, based on a few options of your employer’s choosing. This, unfortunately, won’t give you as many choices as other retirement investment plans. According to the Internal Revenue Service (IRS), assets in a 403(b) plan can be placed in any of the following investment types:
  • An annuity contract provided through an insurance company
  • A custodial account invested in mutual funds
  • A retirement income account set up for church employees
Any earnings on that money will grow tax-free. However, as soon as you begin to withdraw money after age 59½ (the age for eligible distributions), you’ll have to pay taxes on those funds just like ordinary income. On the plus side, you’ll more than likely be in a lower tax bracket during your retirement years than when you were working full-time.

Pro Tip

One of the best features of a 403(b) is the potential for employer-matching contributions. This means your employer could match employee contributions dollar for dollar up to a certain percentage. However, it should be noted that while employers can contribute to your 403 (b), they are not required to do so.

How Roth IRA funds work

A Roth individual retirement account (Roth IRA) is most commonly a personal account, although sometimes a Roth IRA is included with 403(b) plans. But, in general, you set up and fund a Roth IRA on your own through a bank or other financial institution.
A key difference between a Roth IRA and a 403(b) is the way it’s funded. As mentioned, both accounts have tax advantages, and the upside of 403(b) plans is tax-deferred contributions, but you’ll pay taxes on withdrawals.
By contrast, Roth IRA contributions are made with after-tax dollars, and the advantage of that method is tax-free withdrawals at retirement age. In addition, any earnings you make through your Roth IRA are also tax-free.
Another important difference is that, unlike a traditional IRA or a 403 (b), a Roth IRA doesn’t have annual required minimum distributions (RMDs). This means you only need to withdraw Roth IRA funds when you need them. So, if you want to continue to let that tax-free retirement income grow until you really need it, you’re allowed to do so.
You also have a lot more retirement investing options to choose from with a Roth IRA. A 403(b) plan is limited by what your employer offers, whereas you choose what you want to invest in with your Roth IRA. Ideally, you’ll invest in a diversified portfolio that might include a mix of individual stocks, bonds, CDs, mutual funds, exchange-traded funds, or other assets.

Pro Tip

If you’re uncertain about which type of retirement planning is best for you, or you need help choosing investments, you may want to consult with a financial planning expert to help you devise a solid retirement investing strategy. To start, take a look at some of the investment advisors below.

Contribution limits and income limits for Roth IRA and 403(b)

As you plan your retirement strategy, it’s important to be aware of how much money you can contribute to your Roth IRA or 403(b). Additionally, you’ll need to know what your income limits are for a Roth IRA, which a 403(b) doesn’t have.

Contribution limits for 403(b) plans

In 2023, the contribution limit (also known as your elective deferral limit) for a 403 (b) is $22,500 per year. If you’re 50 or older, you’re also eligible for “catch-up contributions,” which amount to an additional $7,500 per year.
In total, the maximum allowed in combined contributions from employees and employers is $66,000 for 2023.

Contribution limits for Roth IRAs

For the year 2023, individuals can contribute up to $6,500 annually to a Roth IRA. Like 403 (b) plans, those who are 50 and older can also take advantage of catch-up contributions. For IRAs, that comes to $1,000 more each year. That comes to a total limit of $7,500 in 2023 for the over-50 crowd.
Annual Contribution LimitsRoth IRA403 (b)
2022$6,000$20,500
2022 for 50 and Older$7,000$27,000
2023$6,500$22,500
2023 for 50 and Older$7,500$30,000
IMPORTANT! The Roth IRA contribution limit is cumulative of all of your IRAs, no matter what kind. For example, if you have both a traditional IRA and a Roth IRA, you can only contribute $6,500 in 2023 between both accounts, or $7,500 if you’re over 50 years of age.

Income limits for Roth IRAs

To be eligible to contribute to Roth IRAs, those who are married and filing jointly must have a combined modified adjusted gross income (MAGI) of $218,000 or less in 2023 to be eligible for the maximum contributions allowed.
If married and filing jointly, and your income is between $218,000 and $228,000, your contributions will start to phase out. However, if your income exceeds $228,000 for 2023, you’re not eligible to contribute to Roth IRAs that year.
If you’re single, the adjusted gross income limit is $138,00 for 2023. Those who make between $138,000 and $153,000 for 2023 can make reduced contributions. In the event that your income exceeds $153,000 for 2023, you’re no longer eligible to make Roth IRA contributions.
Roth IRA Income Limits20222023
Married Filing Jointly (Max Contributions)$204,000$218,000
Married Filing Jointly (Reduced Contributions)$214,000$228,000
Single Filer (Max Contributions)$129,000$138,000
Single Filer (Reduced Contributions)$144,000$153,000

Pros and cons of a 403b vs. Roth IRA

As with all financial products, there are benefits and risks to both 403(b) plans and Roth IRAs. To get a better idea of how they compare to each other, let’s take a look at the pros and cons of each account.
403(b)Roth IRAs
Pros
  • Contributions are made with pre-tax dollars, which lowers your taxable income
  • Higher annual contribution limit than with Roth IRAs
  • Potential for matching employer contributions
  • Your investments grow tax-free
  • Tax-free withdrawals after age 59½
  • No required minimum distributions
  • Private account, so no need to roll it over when you change jobs
Cons
  • Withdrawals are taxed just like ordinary income
  • Required minimum distributions are mandatory
  • Limited investment options available
  • Early withdrawal penalties
  • After-tax contributions mean no tax deduction when you file your taxes
  • Annual contribution limits are much lower than with 403(b) plans
  • Income limits that may prevent you from making Roth IRA contributions
  • Early withdrawal penalties

Should you have both a Roth IRA and a 403(b)?

It’s important to remember that there are no rules that state you can’t have both types of retirement funds.
“Having a balance of both types of retirement accounts can be a smart move for your long-term savings strategy,” says Levon L. Galstyan, a Certified Public Accountant at Oak View Law Group. “Whether having both is right for you depends on your personal financial circumstances, such as your income, expenses, and retirement goals.”
Madison Sharick — CFA, CFP, and owner of MadiManagesMoney — says that many financial planners will ask you to consider whether or not you’ll be paying a higher tax rate when you retire and that should help inform your decision. But she disagrees, pointing out that it’s hard to predict what will happen decades down the road in regard to your income or the U.S. tax code.
Instead of worrying about guessing, I think of a Roth IRA as a way to diversify when you pay taxes and at what rates, especially when used as a complement to a 403(b) (or a 401(k) or traditional IRA). These type[s] of accounts are like a mirror image when it comes to taxes,” says Sharick. “If you’re eligible and able to, contributing to both a 403(b) and Roth IRA is best.”

FAQs

Is it better to do a 403(b) or Roth IRA?

This, of course, depends on your personal finance situation. If you have limited means and don’t feel you can contribute to both, it’s probably best to contribute to an employer-sponsored 403(b) over a Roth IRA. This is because you don’t have to pay taxes on your contributions, which lowers your taxable income for the year.
In addition, the contribution limits are much higher for a 403(b) than a Roth IRA, meaning you can save more for your retirement in a shorter period of time.

How much should I put in my 403(b) per paycheck?

Many financial advisors recommend that you allocate about 15% of your earnings to retirement savings. That said, your personal situation may not make that a reasonable possibility at all stages of your life. Basically, any money you save for retirement is a positive step, and contributing as much as you can is a smart move.
One important point to consider, however, is whether your workplace offers employer-matching contributions. For example, some institutions may require you to contribute a certain percentage of your salary, say 5%, before they will supply matching funds. If at all possible, try to take advantage of this option. Not only is it essentially free money, but it’s also tax-free income.

What’s the five-year rule for a Roth IRA?

One of the benefits of a Roth IRA is that you can withdraw your own contributions at any time without taxes or penalties. However, you’ll be taxed and/or penalized if you try to withdraw any of the earnings you’ve made before age 59½ unless your account has reached the five-year mark and one of the following applies:
  • You withdraw account earnings.
  • You convert a traditional IRA to a Roth IRA.
  • A beneficiary inherits your Roth IRA.
There are a few exceptions to the five-year rule where you may also be able to withdraw funds penalty free (but not necessarily tax-free) in certain situations. These circumstances may include up to $10,000 to buy a first home, money used for higher education, or funds used to pay for unreimbursed medical expenses.

Key Takeaways

  • Roth IRAs and 403(b) plans are retirement investment vehicles meant to build retirement income.
  • A Roth IRA is a personal individual retirement account, whereas 403(b) plans are retirement plans offered by certain types of non-profit or tax-exempt employers.
  • A 403(b) is funded by pre-tax contributions with direct deductions from your paycheck, and Roth contributions are made with after-tax dollars.
  • When you withdraw money from a 403(b), you have to pay income tax on those funds. On the other hand, Roth IRAs are structured to allow tax-free distributions.

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