Is it Better to Max Out a 403(b) or IRA?

by Mark Kennan, Demand Media
    If you work for a nonprofit hospital, your employer may offer a 403(b).

    If you work for a nonprofit hospital, your employer may offer a 403(b).

    Working for certain tax-exempt organizations, such as a nonprofit school or hospital, makes you eligible to put some of your salary into a 403(b) plan to save for retirement. Depending on your financial circumstances, you may have to choose between fully funding your 403(b) plan or your individual retirement account. Whether it's better to max out contributions on a 403(b) or IRA depends on your circumstances. What's best for you may not be best for everyone.

    Tax Deductions

    If you're hoping to maximize your tax deductions for contributions, chances are you're going to be better off maxing out your 403(b) plan. Contributions to 403(b)s are always excluded from your taxable income. Traditional IRA contributions, on the other hand, can't be deducted if you participate in an employer-sponsored plan, such a 403(b), and your modified adjusted gross income exceeds the annual limits. (For example, as of 2013 if you're single and participating in a 403(b) plan, you can't deduct any of your IRA contribution if your MAGI exceeds $69,000.

    Contribution Limits

    Your 403(b) plan offers a significantly higher contribution limit than an IRA. As of 2013, you can defer up to $17,500 -- $23,000 if you're 50 or older -- to your 403(b) plan. Your IRA can only accept up to $5,500, or $6,500 if you're 50 or older. Plus, 403(b) plans allow matching contributions by your employer. For example, your employer might contribute an extra 25 cents for every dollar you contribute to the plan. If you don't max out your 403(b) contribution, you're leaving free money on the table. However, check with your employer first -- not all organizations make matching contributions.

    Tax Benefits

    Traditional IRAs and 403(b) plans both offer tax-deferred savings, so if you can't deduct your IRA contribution, there's no benefit to maxing out your traditional IRA first. However, especially if your employer won't match your contribution and you're in a lower tax bracket than you expect to pay at retirement, consider maxing out a Roth IRA first. Roth IRA contributions are never deductible, so you don't miss out on anything by being covered by an employer plan. Instead, your distributions in retirement don't count as taxable income -- including the earnings -- so you lower your future tax burden.

    Accessing Funds

    In a perfect world, you'd never have a need for the money you put in your retirement plans regardless of whether you put it in a 403(b) plan or IRA. But, financial crises do come up. With a 403(b) plan, you can't take a distribution unless you're 59 1/2, permanently disabled, no longer at the organization or, if your plan allows, in a severe financial hardship. Any distribution before 59 1/2 gets slapped with an extra 10 percent penalty. But, your 403(b) plan can allow you to take out a loan without any penalties. With IRAs, you can take your money out any time, but you owe a 10 percent penalty on the taxable portion. For Roth IRAs, that means you can get your contributions out tax-free and penalty-free any time you want.

    About the Author

    Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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