A Roth IRA and a 403(b) are two different types of retirement plans. Almost anyone can contribute to a Roth IRA. 403(b) plans are only available to employees of public schools and certain other tax exempt organizations. Each plan comes with its own set of advantages and disadvantages, and you should look carefully at both options to determine which makes the most sense for you.
Roth IRA Basics
A Roth IRA lets you put your retirement savings into an account that grows tax-free. You must fund your Roth with taxable earnings and cannot deduct the contributions from your current taxes, but you will not pay taxes later. Just about every brokerage firm and financial services company has jumped on the Roth bandwagon, giving you a incredible range of different investment options. Most Roth participants put their money into stock or bond mutual funds, but many other types of investments are also available.
403(b) plans are tax sheltered annuity (TSA) plans that are only offered through employers for the employees of public schools and some other 501(c)(3) nonprofits and religious institutions. Some 403(b) plans invest in annuity contracts through an insurance company. Others use custodial accounts invested in mutual funds. You are restricted to the accounts chosen by your employer and may not like your choices, particularly if they are annuities that charge high fees. Other plans do, however, offer a comprehensive range of investment options. Contributions are made with pretax dollars through payroll deductions, so you will not pay taxes on that money during the year you invest it. You will, however, pay ordinary income tax on your plan distributions upon retirement.
Some employers match the 403(b) contributions made by their employees -- getting an employer match is like receiving a tax free bonus. You put in some money, and they match your contribution up to a certain percentage or dollar amount. Like your initial investment, you pay no taxes up front but will have to pay income tax when you start to receive distributions. Conversely, Roth IRAs are entirely self-funded.
For investors under the age of 50, the maximum contribution to a Roth IRA is $5,000 through 2010, increasing to $6,000 per year in 2011. 403(b) limits may be determined by your employer and are based on your base salary, but through 2011 they are up to a maximum of $16,500. You may contribute to a Roth IRA and a 403(b) at the same time, but should check with the IRS if you are subject to any maximum income limits.
Things to Consider
Whether you invest in Roth IRAs or a 403(b), you may not take your money out until you reach retirement age. The prospect of tying up your money might sound scary, but you should take comfort in knowing that in special cases, like medical emergencies and buying a home, you can borrow money from your own plan. You will have to pay taxes and penalties on your withdrawals, but you can take comfort in knowing that the money is available. A Roth IRA a wise choice if you think your income tax rate will be higher when you retire than it is now. It also gives you the freedom to invest your money just about anywhere. On the other hand, if your 403(b) offers a match, you should consider taking advantage of the match program, and your participation will lower your current tax burden. If you qualify, you may want to invest in a combination of both plans.
Annabella Gualdoni has written newsletters and reports for corporations and nonprofits since 1994. She is a real estate professional and also teaches subjects including international cooking and travel, dating/relationships and personal finance. Gualdoni has a Bachelor of Arts in international development from University of California, Berkeley, a Master of Arts in international relations from Boston University, and a Juris Doctor from Boston College Law School.