403B and Roth IRA

403B is an employer-sponsored retirement account, while Roth IRA is an individual one. Both have their benefits and drawbacks which makes it hard for some people to decide which is the right investment plan to save up for their retirement.

403B

403B is a retirement savings account where a certain portion of an employee’s salary is deducted from his/her paycheck and deposited into the 403B on his/her behalf by their employer. 

Roth IRA 

Roth IRA is a special type of retirement savings account that you can open on your own either at a bank or an investment company. Contributions into the account are not tax-deductible, but all earnings and withdrawals from it are completely tax-free. 

Unlike many other IRAs, Roth IRA has its maximum contribution limit based on earned income rather than the age of the account holder.

Similarities of 403B and Roth IRA

In order to take full advantage of both types of accounts, it is advisable that the money be invested for a minimum period of five years and longer. 

Both investments should be withdrawn when you reach the age of 59.5 years old and within that time frame, there is no penalty for withdrawing any contributions made towards either account type.

If you withdraw money earlier than being 59.5 years old, you will be charged with a 10% penalty tax on your earnings in addition to any income taxes owed.

Differences of 403B and Roth IRA

The major difference between 403Bs and ROTH IRA is the tax benefits. Contributions to a 403B are deducted from taxable income, while contributions to a Roth IRA are not deductible. However, distributions from both types of accounts are not taxed as long as certain conditions are met. 

  • If you withdraw the money out of the account before reaching the age of 59.5 years old, you will be charged with a 10% penalty tax on your earnings, in addition to any income taxes owed. 
  • With 403Bs, there is an additional benefit called Catch Up Contributions where if you are over 50 years old, then you can contribute up to $6,500 more than the $19,500 yearly contribution limit. 

Another important difference between 403Bs and Roth IRA is that there can be a penalty for early withdrawal of contributions from a 403B while with a Roth IRA, you will not be charged any penalty tax if you withdraw your money before reaching 59.5 years old. 

Benefits of Each Account Type

403B

By contributing to a 403B, you can reduce your taxable income. Withholdings from paychecks deposited into the 403B will lower your taxable income which saves you money on your taxes. 

You will receive an upfront tax deduction when you contribute to the account which can also help lower taxable income and save you money on your taxes. 

To encourage employees to save money towards their retirement, some employers will match contributions into the 403B up to a certain percentage of your salary. 

For example, if you make $40,000 per year and your employer matches fifty percent of the first six percent that is deducted from your paycheck, then you can contribute up to three percent of your salary and your employer will match the other three percent.

Roth IRA 

Roth IRA is not tax-deductible which means you can withdraw your contribution with no penalty at any time. 

Withdrawals from earnings made on contributions will be completely tax-free as long as it has been at least five years since the contribution was made and you are over 59.5 years old.

Drawbacks of Each Account Type

403B

If you withdraw funds from a 403B before reaching the age of 59.5, you will be charged with a 10% penalty tax on your earnings in addition to any income taxes owed which can negate any savings that you received from your contributions. 

Roth IRA

Early withdrawal from a Roth IRA is only taxed on earnings and not on your contributions. 

However, if you withdraw your contributions from a Roth IRA before reaching the age of 59.5 years old, then you will be charged with a 10% penalty tax on your earnings in addition to any income taxes owed making it less advantageous than a 403B.

How Much Money Can You Contribute to Each Account Type

Each account type has its maximum contribution limit that you can contribute every year. 

For 403B, the maximum allowable contribution is $19,500 per year. While for Roth IRA, $6,000 is the maximum contribution one can invest

Withdrawal Schedule for Each Account Type

You will need to withdraw your money from either a 403B or Roth IRA when you reach the age of 59.5 years old and within that time frame, there is no penalty for withdrawing any contributions made towards either account type. 

About earnings, if you withdraw money before reaching the age of 59.5 years old, you will be charged with 10% penalty tax on your earnings in addition to any income taxes owed which can negate savings that you previously received from your contributions.

How to Decide Which One You Should Invest In

If you are concerned about the future of your retirement savings, then you should opt to invest in a 403B because it can help save money on taxes today. 

It is recommended that if you would like to withdraw your money before reaching the age of 59.5 years old, then you should opt for a Roth IRA because withdrawals made from contributions will be completely tax-free as long as it has been at least five years since the contribution was made. 

In terms of fees, both a 403B and Roth IRA can have an annual fee of up to one percent. Therefore, if you would like to pay only a small fee for investing your money, then you should opt for a Roth IRA because it does not have an annual fee. 

If you want to contribute more than $19,500 per year or are concerned about paying taxes on your investment returns, then you should opt for a 403B because it offers both tax-deductible contributions and possible tax savings through withholding amounts from your paycheck. 

You can contribute up to $19,500 per year into a 403B and contribute up to $6,000 per year into a Roth IRA.

The bottom line is that a 403B can offer advantages over a Roth IRA in terms of tax deductions and possible tax savings from withholding amounts from your paycheck. 

Side by Side Comparison

403(b) vs Roth IRA-side by side comparison

Conclusion

A 403B is a type of retirement account provided by an employer which can allow you to receive tax benefits on contributions made towards your account.

A Roth IRA is a retirement savings plan for those who don’t have access to a 401K or 403B. It does not offer any tax deductions but withdrawals from earnings will be tax-free if it has been at least five years since the contribution was made and you are over 59.5 years old.

To conclude, both account types can offer their own set of benefits depending on what is most important for your retirement savings. To decide which one is best for you, consider your financial goals and the time frame you have before you retire.

403B or Roth IRA are equally beneficial in terms of taxes because they are both tax-deferred accounts.
For 403B, the maximum allowable contribution is $19,500 per year while for Roth IRA, it is $6,000.
You will need to withdraw money from both at age 59.5 years old or before. Withdrawals from contributions made towards either account will be tax-free if it has been at least five years since the contribution was made and you are over 59.5 years old.
403B offers a tax deduction on contributions and possible tax savings through withholding amounts from your paycheck while Roth IRA can give you tax-free withdrawals from earnings if it has been at least five years since the contribution was made.
403B offers tax deductions on contributions while Roth IRA does not.
True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.