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

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.

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.

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.

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.