The 403(b) Basics: 403(b) and/or a Roth IRA?
Ideally, eligible participants would contribute the maximum allowable to both a 403(b) and a Roth IRA. If you are stuck with a 403(b) plan with bad choices or only have a limited amount to contribute to a retirement plan, you may want to consider funding a Roth IRA before funding a 403(b). Here's how a Roth IRA works.
Roth IRA Eligibility
- For 2016 single workers earning up to $117,000. Phases out at $132,000.
- Married couples (filing jointly) earning up to $184,000. Phases out at $194,000.
Roth IRA Contribution Amounts
For 2016 the limit is $5,500. In addition if you are 50 or older at any time during the year you can contribute an additional $1,000.
Roth IRA Tax Advantages
No pre-tax advantages, however, withdrawals of contributions are never taxed and are always available for withdrawal. Tax free withdrawal of earnings may begin at age 59-1/2 (account must be held at least five years). Tax free withdrawal of earnings prior to age 59-1/2 may be made in case of disability, first-time home purchase and death.
Roth IRA Pros Compared to a 403(b)
- Can invest money in any financial institution
- Can invest in individual stocks
- Withdrawal of contributions are never taxed
- Earnings grow tax-deferred
- Tax free withdrawal of earnings prior to age 59-1/2 may be made in case of disability, first-time home purchase and death
- Job change doesn't affect account status or require changes
- Easy to arrange dollar cost averaging (purchase of a fixed dollar amount at regular intervals)
- No forced withdrawals at age 70 1/2
Roth IRA Cons Compared to a 403(b)
- Smaller contribution limit
- Does not lower taxable income
- No matching funds
- Not protected from creditors in all states
Other Things to Consider
- As long as you don't exceed the income provisions you can contribute to both plans.
- If you are stuck with lousy investment choices in your 403(b), or are enamored with a particular financial institution, funding a Roth IRA may make more sense.
- If your employer provides matching funds, the 403(b) may be the way to go, at least up to the match.
- Younger workers may be unable to contribute a significant amount to a 403(b), lessening the benefit of pre-tax savings. In this case the lower contribution total and vendor flexibility may make the Roth IRA the best choice.
- One school of thought has investors splitting money between the two plans.
- Uncertainty on future tax rates and policies further complicates the decision.
So which plan is best for you? Only you can make that call. Much of it depends on what you believe your tax bracket will be in the future and whether the deduction is worth more to you today than tax-free income in the future. The real bottom line? Regardless of the plan you choose, get started. Now!
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