What Is the Difference Between a 403(b) & an IRA?

How your retirement looks starts with how your retirement plan works.

How your retirement looks starts with how your retirement plan works.

Saving for retirement can be confusing. There are so many types of retirement plans it can be tough to keep them all straight. Your best bet is to focus only on the retirement plans offered to you. For example, 403(b) plans are limited to employees of certain educational institutions and nonprofit organizations, while IRAs are available to everyone. If you have a 403(b) plan offered by your employer, knowing how it compares to an IRA is all that stands between you and a solid retirement plan.

Introduction to 403(b) Plans

A 403(b) plan is also called a tax-sheltered annuity plan. A 403(b) plan may only be established by a qualified organization. Educational institutions, school districts, and certain nonprofit organizations are the only ones allowed to have 403(b) plans. Contributions to a 403(b) are made via salary reduction and occur pre-tax, meaning that they are not included in your income when you file your taxes. Furthermore, all growth within the account is tax-deferred. In addition, your employer can contribute money to your 403(b), which also grows tax-free.

Introduction to IRAs

An IRA, or Individual Retirement Arrangement, is a personal retirement savings account. Like the 403(b), all money within an IRA grows tax-deferred. Unlike a 403(b), contributions to an IRA are made with after-tax dollars. Certain taxpayers who meet income limitations may deduct the amount contributed to a traditional IRA, however. Only the account owner may contribute to an IRA. No employer contributions are allowed.

Contribution Limits

Contributions to an IRA are limited to $5,000 per year. Taxpayers over age 50 are allowed to make an additional annual contribution of $1,000 as a catch-up contribution. Contributions to a 403(b) are limited to $16,500 per year unless you have at least 15 years of service, in which case an additional $3,000 contribution can be made. Your employer can contribute to your 403(b) as well, so long as the total of both your contributions and your employer's is not higher than $49,000 or 100 percent of your total compensation.

Withdrawing Money

Both IRAs and 403(b)s defer all taxes until withdrawal. If you take money out of the account during retirement, it is taxed as ordinary income. If you withdraw funds before you turn 59-1/2 years old, there is an additional early withdrawal penalty of 10 percent. In addition, both types of account require that you withdraw a certain amount, known as a required minimum distribution, from the account every year once you turn 70-1/2 years old.

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