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Roth 403b vs. Roth IRA: Pros & Cons [EXPLAINED]

Roth 403b vs. Roth IRA: Pros & Cons [EXPLAINED]

There are various accounts to choose from in terms of retirement savings. Read on to discover the differences between a Roth 403b and Roth individual retirement accounts (IRA).

Both Roth 403b and Roth IRA accounts provide you with tax-free income during retirement. Everyone within a certain income limit can contribute to a Roth IRA, but you can only contribute to a Roth 403b if it is offered by your employer. Roth IRAs also have lower annual contribution limits.

Take a closer look at what exactly these Roth accounts are, as well as the pros and cons of each.

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Roth 403b vs. Roth IRA: What to Know About Them

Whether you open a Roth IRA or Roth 403b, you will be saving money in a retirement account that will no longer be taxed in your retirement years. But the two types of accounts are set up very differently. The following information should help you choose between the two, but it is still smart to consult a financial planner or accountant when making retirement plans.

What Is A Roth IRA?

Roth IRAs have been around since 1998 and were introduced to offer a tax-free income source for retirees. Most other retirement accounts give you a tax break initially, but then you will still need to pay taxes on the income you withdraw in retirement. The Roth IRA works differently. You pay taxes on the income while you are still working, so you can have tax-free income during retirement.

A Roth IRA is similar to a traditional IRA in that you can make various investments. Open your Roth IRA at the brokerage of your choice. Most people choose to use their Roth IRA to invest in bonds, stocks, ETFs, and/or mutual funds.

Roth IRA Income Limits

Roth IRAs have income limits and contribution limits. The income limits mean that people with extremely high incomes can't avail of the tax-free retirement income. The annual contribution limit is $6,000 per year but increases to $7,000 once you reach age 50.

But those limits are just for single taxpayers who have a modified adjusted gross income (MAGI) of under $129,000. If you are married and filing jointly, the income limit is $204,000. If you make slightly more, you will have the ability to make reduced contributions.

Once single taxpayers reach a MAGI of $144,000, they cannot contribute anything at all to a Roth IRA. For married taxpayers filing jointly, this limit is $214,000. To explain this more clearly, the following summarizes the contribution limits for Roth IRAs in 2022:

For single filers:

  • Your MAGI is less than $129,000: You can make a full contribution ($6,000 a year under age 50 or $7,000 for age 50 and above)
  • Your MAGI is $129,000 to $144,000: You can make reduced contributions.
  • Your MAGI is above $144,000: You cannot make any contributions.

For married people filing jointly:

  • Your MAGI is less than $204,000: You can make full contributions.
  • Your MAGI is $204,000 to $214,000: You can make reduced contributions.
  • Your MAGI is above $214,000: You cannot make any contributions.

Early Withdrawals

After you have had a Roth IRA for five years, you can make withdrawals without penalties on your contributions. The key here is that if you withdraw investment gains, and not your contributions before you are 59.5, you will have to pay a 10 percent penalty. You will also have to pay income tax.

What Is a Roth 403b?

Even if you are unfamiliar with the idea of a 403b, you have likely heard of a 401k. A 403b is essentially the same, but it is only available to certain people. This type of employer-sponsored retirement account is only for eligible teachers or those working at hospitals, nonprofits, or churches.

As with a 401k, your employer may make contributions to your 403b, but they are not required to. All of that describes a 403b, and a Roth 403b is simply the tax-free variation. This means that your contributions to a Roth 403b are made with your after-tax money, so you don't have to pay taxes on withdrawals during retirement.

Roth 403b Limits

Importantly, Roth 403b accounts do not have an income limit. Anyone can contribute, regardless of income. You simply need to have an employer that offers this type of account.

While there is no income limit, there is an annual contribution limit for a Roth 403b. For 2022, the annual limit is $20,500. If you are at least 50 years old, this increases to $27,000. You will notice that those numbers are much higher than the maximum annual contributions to Roth IRAs. But keep in mind that this is the total limit for all your Roth 403b and traditional 403b accounts combined.

What Happens When You Leave Your Job?

Because your Roth 403b is employer-sponsored, some aspects of the account change when you leave the job, you do have the option to keep your money in the 403b if you want to. However, you can also just roll it into your Roth IRA. Rolling the money into a Roth IRA is a very popular choice, as it lets you access more types of investments and puts you in greater control.

There Are Also Traditional 403bs

It is also worth noting that there are traditional 403bs in addition to Roth accounts. We touched on these briefly above, but the key difference is when you pay taxes on the income. With a Roth 403b, you pay taxes before making the contribution, so you pay them while you are still working. With a traditional 403b, you pay taxes during retirement. This may be enough to motivate you to a lower tax bracket during your working years. If your employer offers both a traditional and Roth 403b, you will have to evaluate the two to decide which makes more sense for you.

Pros and Cons of Each Via Their Differences

A good way to look at the pros and cons of each type of account is by further examining their differences. After all, most comparison factors that are an advantage of one account will be a disadvantage of the other.

Pro for Both: Tax-Free Income in Retirement

As Roth accounts, both a Roth IRA and a Roth 403b provide you with tax-free income in your retirement years. This lets you access the full value of your savings.

Con for Both: You Pay Taxes on the Income Before Investing It

Because the income is tax-free in retirement, it is post-tax income. This means you will pay taxes on it while still working. As such, you may be in a higher tax bracket at the time compared to when you retire.

Pro for Roth IRA: Availability Not Limited to Your Employer

You can only get a Roth 403b if it is offered by your employer. So between the two, a Roth IRA is the only option for many people.

Pro for Roth 403b: Your Employer May Contribute

Because a Roth 403b is employer-sponsored, they may contribute to the account. Many employers offer matching contributions, although they are not required to do so. It is simply a benefit that comes with some jobs.

Pro for Roth 403b: Availability Not Limited Based on Your Income

Remember that you cannot invest in a Roth IRA if your income exceeds a certain amount. For 2022, you won't be able to make full contributions if your income is above $129,000 (single filers) or $204,000 (married individuals filing jointly). By contrast, anyone whose employer offers a Roth 403b can invest in it, regardless of income.

Pro for Roth 403b: Higher Annual Contribution Limits

Both types of accounts have annual contribution limits. Assuming you meet the income restrictions, the maximum annual contribution to a Roth IRA is $6,000, which is increased to $7,000 after age 50. By contrast, the maximum for a Roth 403b is $20,500, increasing to $27,000 after age 50. This means those capable of saving more during their working years can accumulate more in their Roth 403b than their Roth IRA.

Pro for Roth IRA: You Have More Investment Choices

With Roth 403b, you have a limited selection of plans. You don't have much control over the investments other than choosing one of the plans, and these will only include annuities and mutual funds. By contrast, Roth IRAs let you invest in nearly everything. You will have the flexibility to invest in ETFs, mutual funds, bonds, and stocks. There are even ways to get into other investments if you have a self-directed Roth IRA.

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Pro for Roth 403b: Early Retirement without Penalties

As long as your account has been open for at least five years, you won't pay penalties for withdrawing your contributions from a Roth IRA, but you will pay a 10 percent penalty for withdrawing income from the investments. By contrast, 403bs help you avoid those 10 percent early withdrawal penalties if you separate from the 403b service the year you turn 55 or older.

Keep reading: Can I Retire at 60 with 500K? [PLAN OF ACTION]


It is almost impossible to conclude which is better when comparing a Roth IRA and a Roth 403b. They are two different types of retirement accounts, both of which you may have at some point in your life. The biggest difference is that anyone under a certain income level can invest in a Roth IRA, while you can only invest in a Roth 403b if it is offered by your employer. Roth 403bs also allow for higher contributions. It is still best to consult a financial planner or accountant when deciding which type of retirement account to open or how to balance your contributions between the two.

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