403 (b) versus Roth IRA: what's the difference?

The 403 (b) and Roth IRA plans are two vehicles designed for retirement planning. The Roth IRAs are a personal retirement planning vehicle that can be used by anyone. Plans 403 (b) are similar to 401 (k) plans in that they are offered by employers. However, there are specifications for which a plan can be offered. A 403 (b) plan is a retirement account that can only be provided by public school systems, non-profit organizations, some churches and some hospitals. If you belong to this category of employment, you may be wondering what are the differences between the two vehicles and how to optimize their use.

In general, the 401 (k) and 403 (b) schemes are offered by employers. When these plans are available to an employee, they provide an excellent opportunity to save money and possibly receive additional compensation in the form of equal benefits. Counterpart benefits are the amount an employee contributes to the plan, dollar by dollar, within the limit of a specified match limit.

The investment options of a 403 (b) plan are decided by the employer. An employee investing in a 40 (3) plan must choose from the investments available in the plan. As such, each employer's 403 (b) plan may be different, so it's important to read the fine print and understand the options. In general, in addition to the corresponding benefits, the schemes may offer special plan account options, loans and possibly other provisions allowing access in cash.

The 403 (b) plans have maximum contribution limits that are important to identify each year as they increase with annual cost of living adjustments. In 2019, an employee can contribute $ 19,000. Employees over the age of 50 have the opportunity to pay an additional $ 6,000 catch-up contribution for a total of $ 25,000. Overall, employees and employers can contribute a combined total of $ 56,000 in 2019.

In a 403 (b) plan, scheduled contributions are deducted from the member's pay check before tax is calculated, which is considered a pre-tax contribution. This is also considered a type of tax deduction because it reduces the taxable income.

Example: An individual who earns $ 3,000 in a pay period and falls into a 15% tax bracket pays an income tax of $ 450. If that same person contributes $ 500 to a 403 (b) plan, the tax is calculated on income of $ 2,500, bringing the tax bill to $ 375. Using these calculations, participant 403 (b) makes a large contribution to the retirement account and saves $ 75 in taxes at the time of contribution.

Since 403 (b) contributions are paid before taxes, individuals must pay taxes on retirement withdrawals. Distributions can begin without penalty at 59 ½ years. The tax rate on these withdrawals is based on the tax bracket in which the participant is located when withdrawals are made.

Another tax benefit for the 403 (b) plans is that the growth of plan assets is tax-deferred. This means that all dividends, interest and capital gains received in the plan are accumulated tax free until they are withdrawn as income.

A Roth IRA is usually invested in a separate personal account unless it is offered in a 403 (b) plan. Whatever the case may be, the rules applicable to Roth IRAs are the same.

Individual Roth IRA accounts can be opened with any major US broker, Charles Schwab, Vanguard, E-Trade and TD Ameritrade all offer Roth IRA accounts. One of the main differences between a 403 (b) and a Roth IRA is that a Roth IRA is usually a separate personal account that does not need to be adjusted for changes. in the job. A 403 (b) plan will be set up at an employer, while an individual Roth IRA account is held at a brokerage house without requiring any management adjustments if you change jobs. If you leave an employer, a 403 (b) account usually stays open, but many investors often transfer funds for consolidation purposes.

A Roth IRA does not have the advantage of matching the benefits. Therefore, all the money you pay for the Roth IRA is yours. In 2019, individuals can pay a maximum of 6,000 USD to a Roth IRA. Americans age 50 and over can contribute an additional $ 1,000 in catch-up contributions for a total of $ 7,000.

Some of the other important differences between 403 (b) and Roth IRA vehicles relate to taxes. Roth IRA contributions are taken into account after tax contributions. Essentially, you make a contribution from your own pocket, supposed to be already taxed by the standard income tax regulations. There is no tax deduction with a Roth IRA.

The accumulations in a Roth IRA are tax free and the withdrawals of a Roth IRA are tax free in retirement. The Roth IRAs also allow tax-free withdrawals after five years of the account. These tax rules can make IRAs attractive to investors seeking to avoid taxes.

When considering a 403 (b) compared to a Roth IRA, you are not limited to opening one or the other. It can be beneficial to have both types of accounts when planning your retirement savings. However, if you have both, you can choose the priority when allocating your funds. A 403 (b) account is usually the most optimal choice for matching employees because it is money that is given to you in addition to your salary. You will have to pay taxes on these funds in retirement, so take into account the projected tax rate for retirement and subtract it accordingly for future projections.

If you are interested in a Roth IRA, it is good to open an account as soon as possible to enjoy the benefits of the withdrawal after five years. Once your Roth IRA is open, you can contribute as much or as little per year as you like, within the maximum restrictions. In general, it may be optimal to maximize your 403 (b) contributions, and then contribute to your Roth IRA afterwards.