Updated: Apr 01, 2024

403(b) vs. Roth IRA: Which is Better for Your Retirement Savings?

Compare a 403(b) plan to a Roth IRA -- both of which are popular accounts for retirement savings. Learn to choose the best option for you.
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Saving for retirement can feel overwhelming.

There are many acronyms and weird account names to learn.

Common retirement accounts include 401(k)s, 457s, 403(b)s, IRAs, and more.

These all sound like gibberish to people who haven’t investigated how these programs work.

Thankfully, retirement accounts often give you tax advantages that can help you put away more money for retirement.

Learn the differences between two common types of accounts you may come across.

Here’s what you should know about a 403(b) vs. Roth IRAs.

What is a 403(b)?

Essentially, a 403(b) plan is like a 401(k) plan for certain types of employers.

A 403(b) is a retirement plan typically offered by public schools, 501(c)(3) organizations and certain churches for their ministers.

Technically, these plans are called tax-sheltered annuity plans, but they can contain other types of investments.

Your employer sets the eligibility requirements for being able to contribute to the 403(b) plan.

Some employers go as far as automatically enrolling employees as participants.

You can contribute to your 403(b) account through your paycheck.

Even better:

Your employer may also offer matching contributions.

Another option is discretionary contributions to your account without having to match your contributions.

Pros and Cons of 403(b) plans

Pros Cons
  • High contribution limits
  • Workplace plan you don’t have to set up on your own
  • Tax deferred retirement savings
  • Potential for employer matches of your contributions
  • May have a vesting schedule for employer contributions
  • Limited investment choices
  • Not all plans have low fee investment options

Types of 403(b) accounts

Your employer may offer two types of 403(b) accounts: traditional and Roth.

Traditional 403(b)

Traditional 403(b) accounts allow you to make contributions pre-tax.

In this case, you get a tax break today.

Earnings grow tax-free as long as the money is held in the account.

When you withdraw funds in retirement, you have to pay ordinary income taxes on all withdrawals.

This is called a tax-deferred account.

You may also have to pay a penalty if you withdraw funds before the penalty-free withdrawal age.

Due to the traditional 403(b)’s taxation, you will eventually have to start taking required minimum distributions.

This allows the government to collect taxes on the money held within the account.

Roth 403(b)

The other primary 403(b) option is a Roth 403(b). These accounts allow you to contribute money from your paycheck after you pay taxes on it.

Like a traditional 403(b), your earnings grow tax-free.

When you withdraw money in retirement, you don’t have to pay any taxes on the withdrawals.

You still may have to pay penalties if you withdraw funds before the penalty-free withdrawal age, as well.

403(b) contribution limits

Employees under age 50 can contribute up to $19,500 to a 403(b) account in 2021.

If you’re age 50 or older, you can make an additional catchup contribution of $6,500 for a total of $26,000.

403(b) plans also have a special qualification for additional contributions.

If an employee has worked for an organization for 15 or more years, they may qualify to contribute up to an additional $3,000 per year for up to 5 years.

The total contributions to a 403(b) plan for a year are $58,000. This includes any employer contributions and after-tax non-Roth contributions you make.

Deadlines for 403(b) contributions

Contributions to a 403(b) plan must be made in the calendar year.

There is no extension into the following year to make contributions for the previous year.

What is a Roth IRA?

A Roth IRA is an individual retirement account you can open at a brokerage firm of your choice.

This is not an employer-sponsored plan.

Instead, you choose to open and maintain it wherever you wish.

You must have earned income and fall under income limits to contribute to a Roth IRA directly.

Roth IRAs work like Roth 403(b)s as far as taxes are concerned.

Your contributions are made with post-tax money.

You do not get a deduction for these contributions like you might with a traditional IRA.

Your money grows tax-free and you don’t have to pay taxes on earnings.

Pros and Cons of Roth IRAs

Pros Cons
  • Withdrawals are tax-free
  • Freedom to choose the brokerage that holds your account
  • Wider range of investments
  • Contributions can be withdrawn penalty-free at any time
  • Lower contribution limit than employer-sponsored plans
  • Income limits apply for contribution eligibility
  • Requires more oversight on your own
  • No employer match

Tax-free withdrawal

You even get tax-free withdrawals in retirement.

You do have to meet the age requirement and have held the account for more than five years to qualify for this tax treatment, though.

A unique feature of this account type allows you to withdraw contributions at any time without paying taxes or penalties.

This is because you’ve already paid taxes on this money.

Withdrawing earnings early could result in taxes and penalties, though.

Due to the taxation of these accounts, there are no required minimum distributions.

Roth IRA contribution limits

In 2021, you can contribute up to $6,000 to a Roth IRA if you’re under age 50.

People age 50 or older can make additional catch-up contributions of $1,000 for a total contribution limit of $7,000.

This assumes you have the earned income to qualify.

You must also fall under the income requirements.

If you don’t qualify to contribute to a Roth IRA, you may be eligible to contribute to a traditional IRA, backdoor Roth IRA, or mega backdoor Roth IRA.

Roth IRA contribution deadline

Roth IRAs allow you to make contributions until the tax deadline.

For 2021 contributions, they must be made by April 15, 2022.

This gives you a bit more time to max out your contributions.

How to Choose Whether to Invest in a 403(b) vs. Roth IRA

Deciding whether to invest in a 403(b) or Roth IRA may already be decided for you.

If your workplace doesn’t offer a 403(b), you generally can’t contribute to one.

In this case, a Roth IRA may be the only option between these two choices.

If you can choose either one, you could invest in both.

Using a 403(b) and IRA together

Generally, you should contribute to a 403(b) first to earn any available employer matching contributions.

After that, you could continue contributing to a 403(b) or switch to a Roth IRA, depending on your situation.

Nothing says you have to pick one or the other.

A traditional 403(b) and Roth IRA can be a good combination. This way, you can make after-tax and pre-tax contributions.

In retirement, you can choose which account to withdraw from based on your tax bracket.

Ultimately, you must decide what makes sense for your situation.

If your 403(b) offers investments you’re interested in with low costs, it may be worth investing in.

However, some 403(b) plans have incredibly high costs and poor investment choices.

In these cases, investing in a Roth IRA may make more sense after receiving any available 403(b) matching contributions.

Consult an Expert

Ultimately, you may want to consult an expert to help with retirement planning.

Choosing between a 403(b) and a Roth IRA may have implications you don’t understand.

Other investment options also exist.

Based on your current tax rate and other circumstances, an advisor can help you optimize your potential retirement tax situation.

A fee-only fiduciary financial planner can help you make an investment plan to help you save for retirement.

You do have to pay these advisors for their time, but their advice must be in your best interests.

This should remove any conflicts of interest commissioned advisors may have.

After all, contributing to a workplace retirement plan doesn’t result in commissions.

Opening a Roth IRA with a financial advisor may result in commissions, though.