403(b) versus Roth IRA: Benefits, Drawbacks, and Restrictions

403(b) versus Roth IRA: Benefits, Drawbacks, and Restrictions

Both a Roth Individual Retirement Account (IRA) and a 403(b) plan are tax-favored retirement savings tools that enable individuals to save for their golden years. However, there are significant distinctions between the two regarding who can invest, when the tax benefits are obtained, and the contribution limits.

Let's delve into how these accounts operate and examine the advantages and disadvantages of each. We'll also help you decide whether to invest in a Roth IRA, a 403(b), or both.

What is a 403(b)?

A 403(b) is a tax-advantaged retirement savings plan that can be made available by public schools and eligible tax-exempt organizations. Employees can contribute money to their 403(b) plans by authorizing direct deductions from their paychecks. These contributions are made with pre-tax money and are subject to annual contribution limits. Many employers contribute at least part of their employees' contributions.

A 403(b) is similar to a 401(k), which is a retirement plan offered by private-sector employers.

The contribution limits for 403(b) plans are closely aligned with those of 401(k) plans, with most employees eligible to contribute a maximum of $23,500 in 2025 ($23,000 in 2024). Individuals older than 50 are eligible to contribute an additional $7,500 catch-up contribution annually in both 2024 and 2025, while retirees between the ages of 60 and 63 can make catch-up contributions of $11,250 starting in 2025 due to the SECURE 2.0 Act.

Eligible employees with at least 15 years of service may also contribute an extra $3,000 annually as "catch-up" contributions to a 403(b). These standard and catch-up limits are not affected by any matching funds contributed by employers.

Employees of qualifying nonprofit organizations and public schools whose employers offer 403(b) plans.

Investment options for 403(b) plans are often limited to mutual funds and annuities, and early withdrawals (before age 59 1/2) are generally subject to penalties.

Any individual with annual income that does not exceed maximum permissible limits.

What is a Roth IRA?

A Roth IRA is an individual retirement account that you can open for yourself, without needing an employer to offer it. Your contributions are not tax-deductible, but the withdrawals you make in retirement are tax-free.

Contributions are made with pre-tax dollars, conferring tax savings in the year the contribution is made.

Anyone can open and contribute to a Roth IRA, as long as their annual income does not exceed the maximum limit. Contribution limits for Roth IRAs are relatively low – you can contribute $7,000 in 2024 and 2025, or $8,000 if you're older than 50 and eligible to make catch-up contributions. Since Roth IRAs are not employer-sponsored, there's no possibility of receiving employer-matching contributions.

Withdrawals are tax-free in retirement since contributions are made with after-tax dollars.

Early withdrawals from Roth IRAs before age 59 1/2 can be subject to penalties, but any potential penalties only apply to investment gains. You can withdraw your contributions at any time without penalty.

Various types of financial institutions, including online brokers, offer Roth IRAs. You can invest your Roth IRA funds in a wide range of securities.

$23,500 in 2025 ($23,000 in 2024) $7,500 catch-up contribution for both 2024 and 2025 if older than age 50 $11,250 catch-up contributions for 2025 if age 60-63 $3,000 catch-up contribution for employees with service records of 15 years or more for both 2024 and 2024

Major differences

$7,000 in 2024 and 2025 $1,000 catch-up contribution in both 2024 and 2025 if older than age 50

| Aspect | 403(b) plan | Roth IRA || --------------- | ---------------- | ----------- || Eligibility | Employees of qualifying nonprofit organizations and public schools whose employers offer 403(b) plans. | Any individual with annual income that does not exceed maximum permissible limits. || Tax benefits | Contributions are made with pre-tax dollars, conferring tax savings in the year the contribution is made. | Withdrawals are tax-free in retirement since contributions are made with after-tax dollars. || Contribution limit | $23,500 in 2025 ($23,000 in 2024) $7,500 catch-up contribution for both 2024 and 2025 if older than age 50 $11,250 catch-up contributions for 2025 if age 60-63 $3,000 catch-up contribution for employees with service records of 15 years or more for both 2024 and 2024 | $7,000 in 2024 and 2025 $1,000 catch-up contribution in both 2024 and 2025 if older than age 50 || Employer match | Employers may match employee contributions up to annual contribution limit. | No employer matching contributions are available. || Investment options | Limited investment choices, which are determined by your plan administrator. | Almost any type of investment. || Withdrawal rules | Early withdrawal penalties apply to most withdrawals made before age 59 1/2. | Early withdrawal penalties apply only to investment gains withdrawn before age 59 1/2. |

Pros and cons

Employers may match employee contributions up to annual contribution limit.

403(b) vs. Roth IRA: Pros

No employer matching contributions are available.

Both 403(b) plans and Roth IRAs offer advantages to investors. Here are some of the key advantages of a 403(b) plan:

• Employers typically match part of your contributions.
• Tax savings are conferred in the same year that you make a contribution.
• Contribution limits are high, especially if you are eligible for catch-up contributions.
• Your eligibility is not affected by your annual income.

Limited investment choices, which are determined by your plan administrator.

Key advantages of a Roth IRA:

Almost any type of investment.

• You have the freedom to establish and contribute to a Roth IRA without depending on your employer.
• Variety is abundant when it comes to investment options.
• As a retiree, you can withdraw funds tax-free under specific conditions.
• You can withdraw your contributions without penalty at any point in time.

403(b) vs. Roth IRA: Drawbacks

Early withdrawal penalties apply to most withdrawals made before age 59 1/2.

Some disadvantages associated with a 403(b) plan include:

Early withdrawal penalties apply only to investment gains withdrawn before age 59 1/2.

• Limited investment options are available.
• Early withdrawals of both contributions and gains result in penalties.
• In retirement, distributions are subject to regular income tax rates.

Some disadvantages of a Roth IRA include:

• Roth IRAs are off-limits for individuals whose annual income surpasses a certain threshold.
• Annual contribution limits are relatively low.
• You must wait until retirement to reap tax benefits.
• To make tax-free withdrawals following retirement, you must adhere to the "five-year rule".

Should you opt for a 403(b) or a Roth IRA?

You don't necessarily have to choose solely between a Roth IRA and a 403(b) plan.

If your employer provides a 403(b) plan and your income falls below the Roth IRA contribution limit, you can contribute to both a 403(b) plan and a Roth IRA. This strategy grants you access to a variety of retirement accounts, allowing you to capitalize on both current-year and deferred tax breaks.

If you don't have sufficient funds to contribute the maximum amounts to both types of accounts, prioritize maxing out your 403(b) plan contributions to secure the maximum possible employer match. Take advantage of your employer's matching contributions before investing in a Roth IRA.

Also, consider your anticipated tax rate in retirement. If you anticipate being taxed at a higher rate later in life, then a Roth IRA might be your better choice.

Your employer may offer a Roth 403(b) plan, which you might consider contributing to. Although the investment possibilities offered through this type of retirement account are restricted, similar to traditional 403(b) plans, Roth 403(b) plans allow you to defer tax savings until retirement, just like Roth IRAs.

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In light of the information provided, here are two sentences that contain the words 'retirement', 'money', and 'finance':

1. To maximize your retirement savings, you might consider investing in both a 403(b) plan and a Roth IRA, as they each offer unique tax and financial advantages.
2. Carefully considering your financial situation and tax expectations in retirement is crucial when deciding whether to allocate your money towards a 403(b) or a Roth IRA, as each has its distinct benefits and drawbacks.

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