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

Each has its own pluses and minuses

403(b) vs. Roth IRA: An Overview

Both 403(b) plans and Roth individual retirement accounts (IRAs) are vehicles designated for use in retirement planning. A Roth IRA is a personal retirement planning vehicle that can be used by anyone. Notably, 403(b) plans are similar to 401(k) plans in that they are offered by employers, but which plan is offered depends on the type of employer.

A 403(b) plan is a retirement account that can be offered only by public school systems, nonprofit organizations, and some churches and hospitals. If you fall into this category of employment, you may be wondering about the differences between the two vehicles and how to optimize their use.

Key Takeaways

  • Both 403(b) and Roth individual retirement accounts (IRAs) are vehicles used for retirement investing.
  • 403(b) accounts are offered by public employers and certain nonprofit, tax-exempt employers.
  • Roth IRAs can be opened by anyone.
  • 403(b) and Roth IRAs have different rules and maximum contribution limits. 

How a 403(b) Works

Both 401(k) plans and 403(b) plans are offered through employers. When these plans are available to you, they offer a great opportunity to both save and potentially receive extra pay in the form of matching benefits. Matching benefits match the amount that you contribute to the plan, often dollar for dollar, up to a specified limit.

A 403(b) plan’s investment options are decided by your employer. An employee who invests in a 403(b) plan must choose among the investments available within the plan. As such, each individual employer’s 403(b) plan may be different, so it’s important to read the fine print and understand the options. In general, in addition to matching benefits, plans may offer special plan account options, loans, and other provisions that can allow for accessible cash.

Notably, 403(b) plans have maximum contribution limits, which are important to identify annually, as they increase with annual cost-of-living adjustments. In 2021, you can contribute $19,500 ($20,500 for 2022).

Employees over the age of 50 have the option to contribute an extra $6,500 in catch-up contributions for a total of $26,000 in 2021 ($27,000 for 2022). Comprehensively, employees and employers can contribute a combined total of $58,000 in 2021 ($61,000 in 2022).

How 403(b) Plans Are Taxed

In a 403(b) plan, scheduled contributions are deducted from your paycheck before taxes are calculated. This is called a pretax contribution, and it is considered a type of tax deduction, as it lowers the taxable income.

For example, an individual who earns $3,000 in a pay period and falls into a 15% tax bracket pays $450 in income tax. If that same individual contributes $500 to a 403(b) plan, the tax is calculated on an income of $2,500, bringing the tax bill to $375. Using these calculations, the 403(b) participant makes a significant retirement account contribution and saves $75 in taxes at the time of the contribution. However, any contributions that you make to a Roth IRA are always available for withdrawal, tax- and penalty-free.

Because 403(b) contributions are made pretax, you must pay taxes on the withdrawals that you make in retirement. Distributions can begin without penalty at age 59½. The tax rate on those withdrawals is based on the tax bracket into which you fall when the withdrawals are made.

Another tax advantage for 403(b) plans is that growth in plan assets is tax deferred. This means that all dividends, interest, and capital gains received in the plan are accumulated tax free until they are withdrawn as income.

Contributions to 403(b) plans are made with pretax dollars, meaning that you will pay tax on distributions, while contributions to Roth IRAs come from after-tax dollars, resulting in tax-free distributions.

How a Roth IRA Works

A Roth IRA is usually invested through a separate personal account unless it is offered within a 403(b) plan. Regardless, the rules for Roth IRAs are all the same.

Individual Roth IRAs can be opened through just about any large brokerage in the United States. Charles Schwab, Vanguard, E-Trade, and TD Ameritrade all offer Roth IRAs. One of the main differences between a 403(b) and a Roth IRA is that a Roth IRA is usually a separate personal account that does not need to be adjusted through employment changes.

A 403(b) plan will be held with an employer, while an individual Roth IRA is held at a brokerage, with no need for management adjustments if you change jobs. If you leave an employer, a 403(b) account typically still remains open, but many investors will often transfer the funds for consolidation purposes.

A Roth IRA does not have the advantage of matching benefits. Therefore, all of the money that you contribute to the Roth IRA is your own. In both 2021 and 2022, you can contribute a maximum of $6,000 to a Roth IRA. If you are age 50 or older, you can contribute an additional $1,000 in catch-up contributions, for a total of $7,000.

There are income limits for being allowed to contribute to a Roth IRA. In 2021, if you are married filing jointly, you can contribute the maximum amount if your modified adjusted gross income (MAGI) is less than $198,000 ($204,000 for 2022). If your income falls in the $198,000–$208,000 range ($204,000 to $214,000 for 2022), you can contribute a reduced amount. If it’s $208,000 or more ($214,000 for 2022), you cannot contribute to a Roth IRA for this year. If you file single, these amounts for 2021 are $125,000 ($129,000 for 2022), $125,000 to $140,000 ($129,000 to $144,000 for 2022), and $140,000 or more ($144,000 for 2022).

If you are married filing separately and lived with your spouse at any time during the year, you cannot contribute if your MAGI is $10,000 or higher. There are no income limits for a 403(b). These rules apply in both 2021 and 2022.

Filing Status  2021 MAGI 2022 MAGI Contribution Limit
Married filing jointly (or qualifying widow(er))      
  Less than $198,000 Less than $204,000 $6,000 ($7,000 if age 50+)
  $198,000 to $207,999 $204,000 to $213,999 Begin to phase out
  $208,000 or more  $214,000 or more Ineligible for direct Roth IRA
Married filing separately (and you lived with your spouse at any time during the year)      
  Less than $10,000 Less than $10,000 Begin to phase out
  $10,000 or more $10,000 or more Ineligible for direct Roth IRA
Single, head of household, or married filing separately (and you didn’t live with your spouse at any time during the last year)      
  Less than $125,000 Less than $129,000 $6,000 ($7,000 if age 50+)
  $125,000 to $139,999 $129,000 to $143,999 Begin to phase out
  $140,000 or more $144,000 or more  Ineligible for direct Roth IRA

How Roth IRAs Are Taxed

Some of the other big differences between 403(b) and Roth IRA vehicles have to do with taxes. Roth IRA contributions are considered after-tax contributions. Essentially, you are making a contribution from your own pocket, which is believed to already be taxed with standard income tax regulations. There are no tax deductions with a Roth IRA.

Earnings in a Roth IRA are tax free, and withdrawals of funds from a Roth IRA are tax free in retirement. Roth IRAs also allow for tax-free withdrawals after the account’s five-year anniversary if all other qualifications are met.

Choosing the Right Tool

When considering a 403(b) vs. a Roth IRA, you are not limited to opening one or the other. It can be beneficial to have both types of accounts when planning your retirement savings. However, if you have both, you may want to choose which to prioritize when allocating your funds. Note that there are special rules concerning contribution limits when contributing to both plans.

A 403(b) account is generally the most optimal choice if there is employee matching, as this is money given to you in addition to your salary. You will have to pay taxes on these funds in retirement, though, so keep in mind your expected tax rate then and subtract accordingly for future projections.

If you’re interested in a Roth IRA, it’s good to open an account as soon as possible, to take advantage of the withdrawal benefits after the five-year anniversary. Once your Roth IRA is open, you can contribute as much or as little annually as you would like, in line with the maximum restrictions. Generally, it can be optimal to max out your 403(b) contributions first, then contribute to your Roth IRA.

Can I have both a 403(b) and a Roth individual retirement account (IRA)?

Yes, you can have both investment vehicles, as long as you stay below the income limits for the Roth individual retirement account (IRA). There is an upper limit for how much you can earn in a year and still make tax-advantaged contributions to a Roth IRA, unlike a 403(b), which has no upper income limits. If you earn more than the maximum limit for a Roth IRA, then you can still contribute to your 403(b) plan.

Can I keep my Roth IRA if I change jobs?

Yes. An IRA exists separately from employer-sponsored plans. Typically, they are held at a brokerage or bank and are dependent on contributions that you make yourself, independent from your employer.

How much can I contribute to my 403(b)?

The contribution limit for 2021 is $19,500 and $20,500 for 2022. If you are over age 50, you may make additional catch-up contributions of up to $6,500 in 2021 and 2022.

The Bottom Line

Roth IRAs and 403(b) plans are complementary tools for your retirement. While Roth IRAs allow your contributions to grow tax free, you can contribute a much larger amount to your 403(b) plan. In addition to higher limits, 403(b) plans also offer the option for employer matches, which is essentially free money toward your retirement. Using both tools is a wise strategy for your retirement.

Article Sources

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  1. Internal Revenue Service. “Publication 571 (01/2022), Tax-Sheltered Annuity Plans (403(b) Plans).”

  2. Internal Revenue Service. “2022 Limitations Adjusted as Provided in Section 415(d), etc.,” Page 1.

  3. Internal Revenue Service. “2022 Limitations Adjusted as Provided in Section 415(d), etc.,” Pages 1–2.

  4. Internal Revenue Service. “Retirement Plans FAQs Regarding 403(b) Tax-Sheltered Annuity Plans.”

  5. Investor.gov, U.S. Securities and Exchange Commission. “Individual Retirement Accounts (IRAs).”

  6. Internal Revenue Service. “Retirement Topics — IRA Contribution Limits.”

  7. Internal Revenue Service. “2022 Limitations Adjusted as Provided in Section 415(d), etc.,” Page 4.

  8. Internal Revenue Service. “Amount of Roth IRA Contributions That You Can Make for 2021.”

  9. Internal Revenue Service. “Is the Distribution from My Roth Account Taxable?

  10. Internal Revenue Service. “How Much Salary Can You Defer If You’re Eligible for More than One Retirement Plan?

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