403(B) Vs. Roth IRA: Which Is Better For You?

The Roth IRA has become one of the most popular retirement savings vehicles in recent years. In part, that’s because it offers a unique combination of benefits not offered by any other type of retirement account. IRAs allow you to deduct your contributions from your taxable income for that year, which is the most widely available type of retirement savings. They also allow you to grow your savings tax-free, which is especially beneficial if you fall into one of the high-tax retirement categories we’ve discussed. Finally, IRAs let you take money out as needed without penalty or taxes. You can choose to take a lump sum or receive regular withdrawals. But what exactly is a Roth IRA? How does it compare with the standard retirement account, known as a 403(b) plan? Which one should you choose, and what are the pros and cons of each type of account? Let’s take a look.

What is a Roth IRA?

The Roth IRA (Individual Retirement Account) is one of the most popular retirement savings vehicles in the United States. In fact, according to a recent survey by the Investment Company Institute, nearly half of all American workers who are not already retirement-aged have saved for retirement in a Roth IRA or another type of retirement account. Technically, an IRA is any account that allows you to make tax-deferred contributions and receive tax-free withdrawals during retirement. But when most people talk about IRAs, they’re usually talking about Roth IRAs, Traditional IRAs, or SEP IRAs. Although IRAs have been around for a long time, Roth IRAs are a relatively recent addition to the retirement savings landscape (introduced in 1998). The Roth IRA is designed to encourage more people to save for retirement and make it easier for them to do so.

Roth IRA vs. 403(b) – What’s the Difference?

The 403(b) and the Roth IRA both offer tax advantages that the standard personal savings account (such as a regular savings account) doesn’t. The main difference between the two is that with a Roth IRA you pay tax now, but with a 403(b) you pay tax later. With a Roth IRA, you pay tax on the amount you earn now, but when you retire, you can withdraw the money tax-free. With a 403(b), you pay tax on the amount you earn now, but when you retire, you have to pay tax on the amount withdrawn. In other words, the Roth IRA is a retirement account that allows you to defer taxes until retirement, while the 403(b) is a retirement account that allows you to pay taxes now but not later.

Why Choose a Roth IRA Over a 403(b)?

As we’ve seen, the Roth IRA and the 403(b) offer similar benefits. So why choose one over the other? Well, the Roth IRA has several key advantages over the 403(b) that make it a more attractive choice for most people.

Higher contribution limits - The Roth IRA allows you to contribute more to your retirement savings than a 403(b) plan does. The maximum annual contribution limit for a Roth IRA is $6,000 if you’re younger than 50 and $7,000 if you’re 50 or older. The maximum annual contribution limit for a 403(b) plan is $19,000.

No income limitations - Unlike a 403(b), there are no income limitations for who can open a Roth IRA. So if you’re in a low-income tax bracket now, you can contribute to a Roth IRA and pay tax on the amount you earn now. When you retire, you can withdraw the money tax-free. If you earn a low income, you can open a 403(b) plan, but you won’t be able to contribute as much to the plan or receive a tax break right away. You’ll have to wait until you retire to get the tax break.

Pros of a Roth IRA

• Tax advantages. A Roth IRA is a tax-advantaged retirement account. That means you pay tax on the amount you earn now, but when you retire, you can withdraw the money tax-free. A 403(b) plan, on the other hand, allows you to pay tax on the amount you earn now and pay tax on the amount withdrawn during retirement. 
• No income restrictions. There are no income restrictions on who can open a Roth IRA. So if you’re in a low-income tax bracket now, you can contribute to a Roth IRA and pay tax on the amount you earn now. When you retire, you can withdraw the money tax-free. 
• Easy to set up. To open a Roth IRA, all you have to do is go to a website like Vanguard.com and click on “Open an account.” The process takes less than 10 minutes. To open a 403(b) plan, you have to go through your employer. Accessible to both employees and self-employed persons. You can open a Roth IRA if you’re either an employee or self-employed. You can’t open a 403(b) if you’re self-employed. 
• No discrimination in favor of employees. Unlike a 403(b), a Roth IRA is not discriminatory in favor of employees. This means you can open a Roth IRA regardless of whether you are an employee or a self-employed person.

Cons of a Roth IRA

Taxable income in retirement - The only real disadvantage of a Roth IRA is that you pay tax on the amount you earn now. But during retirement, when you withdraw the money, it will be taxable. With a 403(b), you pay tax on the amount you earn now, but when you withdraw the money in retirement, it is not taxable.

• Income limit. Unlike a Roth IRA, a 403(b) plan allows you to contribute more if you earn a low income.
• Contributions are limited to your employer’s plan. If you work for a company, you can only contribute to the employer’s 403(b) plan. With a Roth IRA, you can open an account at any financial institution.
• Employer match. Unlike a Roth IRA, a 403(b) plan may provide an employer match.

Conclusion

The Roth IRA is a popular retirement savings account that allows you to contribute more to your retirement savings than a 403(b) plan. Unlike a 403(b) plan, a Roth IRA does not offer any upfront tax benefits. Instead, a Roth IRA offers tax-free earnings in retirement. You must meet certain requirements to open a Roth IRA, but it’s an excellent way to boost your retirement savings. Unlike a 403(b), the Roth IRA allows you to defer taxes on the amount you earn now and pay taxes on the amount withdrawn in retirement. It’s easy to open an account and has no income limitations. The only real disadvantage of a Roth IRA is that you pay taxes on the amount you earn now, but when you withdraw the money in retirement, it will be taxable.