Both 403(b) plans and SIMPLE IRAs, or savings incentive match plans for employees, offer tax-sheltered growth. As long as the money stays in the account, you won't owe any taxes on it. Only nonprofits can offer 403(b) plans, while only employers with less than 100 employees can offer a SIMPLE individual retirement account.
Early Withdrawal Penalties
SIMPLE IRAs and 403(b)s impose an early withdrawal penalty on distributions taken before you turn 59 1/2 years old. For 403(b)s, the penalty is a 10 percent additional tax. For SIMPLE IRAs, the penalty jumps to 25 percent if you take the early withdrawal within two years of opening the account. Any early withdrawals taken after the two years are up are hit with the regular 10 percent penalty.
The exceptions from the early withdrawal penalty also differ between a SIMPLE IRA and a 403(b). Both retirement plans allow exceptions if you're permanently disabled or have medical expenses exceeding 10 percent of your adjusted gross income, but that's where the similarities end. SIMPLE IRAs also allow early withdrawals for health insurance when you're unemployed, higher education expenses or up to $10,000 for a first home purchase. On the other hand, 403(b)s allow an exception if you leave your job after turning age 55.
Only 403(b) plans can offer a Roth option, which means you can make after-tax contributions. With a Roth, you can't deduct the cash you kick in, but the money grows tax-free in the account and then comes out tax-free when you take qualified distributions. This may help if you expect to pay a lower tax rate in retirement than you do now. SIMPLE IRAs can't offer a Roth option, so you're stuck with pretax contributions.
SIMPLE IRAs have different contribution limits from those of 403(b) plans. As of 2013, you can sock away up to $17,500 a year in a 403(b) but only $12,000 in a SIMPLE IRA. With a 403(b), your employer isn't required to contribute to your account. The total of your contributions and your employer's can't exceed the yearly limit -- $51,000, as of 2013. With a SIMPLE IRA, your employer must contribute 2 percent of your salary or match your contributions up to 3 percent of your pay.
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