403(b) vs. Roth IRA

The Roth IRA and traditional 403b plan are retirement savings plans. They allow you to contribute money every year and benefit at retirement from regular savings and investment. While the Roth IRA is an individual retirement plan, the 403b is a group plan that allows matching contributions from employers. Their most important difference is in how they allow your savings to be taxed.


The Roth IRA

Roth IRAs do not allow you to deduct the amount you contribute from your income for tax purposes. If you earn a taxable income of $50,000 a year and contribute $2,000 to the IRA, you still owe tax on $50,000. However, the money you save in a Roth IRA is not taxed as income when you withdraw it.


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Traditional 403b

A traditional 403b plan can be offered to certain education and government employees, self-employed ministers and to those working for tax-exempt organizations. It is similar to the 401k plan available to employees in the private sector. The 403b does not allow investments in stocks; instead it allows the purchase of annuity contracts or custodial accounts invested in mutual funds. It allows you to deduct the amount you contribute from your income for tax purposes. If you earn $50,000 and contribute $2,000 into the plan, your taxable income is $48,000. You get tax savings right away. But if you withdraw money from the plan before you turn 591/2, you pay a penalty. Also, money that you withdraw from the plan in retirement is taxable.


Which is Better?

Which plan to use depends on how much you earn and on the amount of income tax you expect to pay. After you retire, you will probably earn less money, so you will pay a lower rate of tax. Most workers earn more money and pay a higher rate of income tax before they retire. The traditional 403b will result in paying income tax on savings in the future, but, for most people, at a lower rate. The Roth IRA forces you to pay taxes on the money you save this year but allows you to withdraw that money in the future tax-free. If your tax bracket is the same now and when your retire, the plans will leave you with the same amount of money. If you make less after retirement, and pay tax in a lower tax bracket, the traditional 403b is better. If you expect to earn more after retirement, a Roth plan is better.


Some Other Factors

As a group plan, the 403b allows employers to make matching contributions. This can add up significantly over time. The Roth IRA does not offer the same feature. If you're saving for retirement, there are other factors to consider, including your expectations for the investments in your plan. If the stock market does well, and your investments increase significantly in value, the Roth plan holds the advantage--the profitable account is protected from high taxes. If your investments don't do so well, or are at a stable and fairly low fixed rate, the traditional 403B is better.



The Roth also holds an important advantage in that it does not require withdrawals, nor are you penalized for early withdrawals. The laws governing 403bs allow distributions to begin at 59 1/2 years, and require regular distributions in the year you turn 701/2 whether or not you need the money. And early withdrawals from a 403b and other traditional IRAs are penalized at 10 percent and taxed as normal income.


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