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Roth IRA vs. 403(b): What Is Best For You?

November 30, 2020 · 5 minute read

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Roth IRA vs. 403(b): What Is Best For You?

While it’s common knowledge that saving for retirement is a good idea, there are many paths to get there. When exploring their options, many people wonder about the 403(b) vs. Roth IRA, and the pros and cons of each.

Both 403(b) and Roth IRA are types of retirement plans. But there are important differences in eligibility, taxation, and other rules that can make one plan more attractive than the other, depending on an individual’s needs and circumstances.

Comparing 403(b) & Roth IRA

When making the decision between a Roth IRA vs. 403(b), it’s helpful to have a full understanding of both types of accounts in order to make an informed choice.

What is a 403(b)?

Similar to a 401(k), a 403(b) retirement plan is sponsored by an individual’s employer. Under such programs, an individual may contribute a portion of their salary and may also receive contributions from their employer. However, while 401(k)s are offered by for-profit businesses, 403(b)s are only available to:

•  Employees of public schools, including public colleges and universities
•  Churches
•  Tax-exempt 501(c)(3) charitable organizations

As with all types of requirement plans, the differences are often in the details. The IRS has rules governing 403(b)s and there may also be differences between various employers’ plans. As the IRS requires companies to fully document their plans in writing—including all terms and conditions—it is worth taking some time to review specific plan details.

What is a Roth IRA?

Unlike employer-sponsored retirement plans, Roth IRAs fall under the category of “Individual Retirement Arrangements.” Just as it sounds, this type of retirement savings plan is individually managed—think of it as a personal savings account dedicated specifically to retirement.

A Roth IRA can be set up through a bank, insurance company, and even online IRA accounts. However, unlike a regular savings or investment account, there are many things to learn about opening a Roth IRA, including rules that impact how retirement funds are taxed, how much money an individual can contribute annually, and other important considerations.

One key detail to note is that Roth IRAs are available to individuals with an income below annually established thresholds. Eligibility for contributing to a Roth IRA is capped at the following income levels:

•  In 2020: $139,000 for single filers and $206,000 for married couples filing jointly
•  In 2021: $140,000 for single filers and $208,000 for married couples filing jointly

Another primary difference between Roth IRAs and other types of retirement plans is when an individual is taxed. Generally, taxation on retirement plans is deferred until later funds are withdrawn as distributions (typically upon or after retirement). With Roth IRAs, contributions are taxed when the income is earned and deposited into the individual’s retirement account. The funds are not taxed later, when an investor withdraws contributions or makes a qualified distribution.

Roth 403(b) vs. Roth IRA: Are They the Same Thing?

Simply put, a Roth 403(b) is not the same as a Roth IRA, though both are funded with after-tax dollars.

Like regular 403(b)s, Roth 403(b)s are plans that are run by non-profit employers. An individual may establish a designated Roth account within their 403(b), allowing them to make Roth-style contributions—meaning taxes are not deferred. When an individual contributes to a Roth 403(b), they pay income tax in the year their contribution is earned, and not when the funds of their retirement plan are distributed.

Which is Better: a 403(b) or Roth IRA?

No one plan is universally better than another. Deciding between a 403(b) or Roth IRA, is a personal choice, depending on an individual’s retirement goals.

To make an informed decision about which retirement plan is right for you, it can be helpful to conduct a side-by-side comparison of both plans. This chart breaks down some of the main differences, giving you a better understanding of these types of retirement plans, so that you can weigh the pros and cons of a Roth IRA vs. 403(b).

403(b) Roth IRA

Who can participate? Employees of the following types of organizations:
•  Public school systems, if involved in day-to-day operations
•  Public schools operated by Indian tribal governments
•  Cooperative hospitals and
•  Civilian employees of the Uniformed Services University of the Health Sciences
•  Certain ministers and chaplains
•  Tax-exempt charities established under IRC Section 501(c)(3)
•  Individuals earning less than the following amounts:
•  Single filers earning less than $139,000 for 2020 and $140,000 for 2021
•  Married joint filers claiming less than $206,000 for 2020 and $208,000 for 2021
Are contributions tax deductible? Yes No
Are qualified distributions taxed? Yes No (if not qualified, distribution may be taxable in part)
Annual individual contribution limit $19,500 for 2020 (plus catch-up contributions up to $6,500 for those age 50 and older) The lesser of:
•  $6,000 (individuals 50 and older may contribute $7,000) or
•  Total annual compensation
Are early withdrawals allowed? Depends on individual plan terms and may be subject to a 10% penalty Yes, though account earnings may be subject to 10% penalty if funds are withdrawn before account owner is 59.5 years old.
Plan administered by Employer The individual’s chosen financial institution
Investment options Determined by employer plan Up to the individual, though certain types of investments (collectibles, life insurance) are prohibited
Fees Varies depending on individual plan terms Varies depending on account type/product and financial institution
Portability As with other employee-sponsored plans, individual must roll their account into another fund or cash out when switching employers Yes

Potential Benefits of a 403(b) and a Roth IRA

There are positives to both a 403(b) and a Roth IRA—and because it’s possible for qualified individuals to open a Roth IRA and a 403(b), some people may decide that their best strategy is to use both.

Pros of 403(b)

•  Contributions are automatically deducted by an employer from the individual’s paycheck, which can make it easier to save
•  If an individual earns less money annually in retirement than during their working years, deferring taxes may mean they ultimately pay less
•  Some employers offer contribution matching, meaning for every dollar an employee contributes, they accumulate two towards retirement
•  Greater annual contribution limit
•  Some plans may also allow designated Roth contributions; in such cases, an individual may contribute to both accounts in a given year

Pros of Roth IRAs

•  Individual can invest with any financial institution and have greater flexibility in investment products
•  Withdrawal of contributions are not taxed; withdrawal of earnings are not taxed under certain conditions and/or after age 59.5
•  Account belongs to the owner and is not affected if the individual changes jobs

The Takeaway

It’s never too early to start thinking about saving for retirement. While there can be benefits to participating in an employer-sponsored plan—especially if it offers contribution matching, which many think of as “free money”—the flexibility and control of Roth IRAs can make for an appealing option.

For some people, it’s possible to contribute to a Roth IRA and a 403(bk). That’s just one example of how there are different ways to start saving for retirement, in different combinations of investment vehicles.

Diversifying a retirement portfolio is one way to actively prepare for retirement. SoFi Invest® offers Roth and Traditional IRAs, as well as other investment accounts.

Find out how Sofi Invest can help you plan for retirement.


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