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Pluses, Minuses of Roth IRA, 403(b)

Posted by Tom Mellish, Executive Director, IRTA on Apr 8, 2016 8:00:00 AM

Should I fund a Roth IRA or a 403(b) plan?

These are both great retirement planning options, but you may have reasons to choose one plan over the other. 

If you have enough disposable income, the answer is easy - fund both. If you are only able to afford one plan at this time, consider your options to help with your decision.Roth-IRA-and-403b.png

The Roth IRA plan’s best benefit is the ability to withdraw money from the account free from Federal Income Tax once you meet retirement requirements. If you put $5,500 into a Roth IRA this year and it grows to $16,000 at retirement, you can withdrawal all $16,000 and not pay any federal income taxes.  The uncertainty of the federal deficit and potential tax increases make this an attractive consideration.

A Roth IRA also offers easier access to the money in the account. Withdrawal rules are more restrictive with potential penalties compared to a 403(b) plan, but you can remove the money at any time.

403(b) plans vary and you will need to consult with their plan administrator concerning the early withdrawal rules and penalties. You can loan money out of your 403(b) account, but it must be paid back with interest. You may not be able to contribute to your 403(b) account until you have repaid the loan.

A great advantage of the 403(b) plan over the Roth IRA is the fact that employers will match employee contributions to a set point. These contributions can enhance the overall value of a 403(b) account. 

Tax liability on these contributions does not kick in until withdrawal, which is another benefit. For a Roth IRA, the money used to fund the account is an after-tax basis.

Annual contributions can make a big difference. This is the reason it is recommended that you first fund your employer sponsored retirement fund or at least to the point the employer matching stops.

You can withdraw your contributions from a Roth IRA without penalty at any time as long as you have had the account for more than years. The investment gains can be withdrawn after age 59 1/2. You do not have to start withdrawing from your Roth IRA at age 70 1/2. 

Another benefit in favor of the 403(b) plan is that you may contribute up to $18,000 per year and - if you are older than 50 - you may contribute an additional $6,000 for a total of $24,000.  The Roth IRA limit is $5,500 per year - unless you are older than 50, and then you can contribute an additional $1,000 for a total of $6,500.

In the past, 403(b) accounts offered limited flexibility with investment options such as 3-5 mutual funds.  These funds provided relatively low returns, but were very safe during a bear market. Nowadays 403(b) accounts have an expanded menu of investment options and mirror other investment accounts used for retirement.

One other strength of a 403(b) plan is that it is very well protected by federal law in the case of bankruptcy. The IRA’s have very little or no protection during bankruptcy proceedings.

Do your homework on your retirement planning options to get the most out of your hard earned money and let it work for you when you get to the end of your career. 

Good luck and happy planning.

The Educator's Guide to Retiring with Purpose

Topics: finance

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