We are loving these guest posts from our clients! A brand new client who started last week, Brian, a recent college graduate from the University of Minnesota has been looking into possible retirement accounts now that he has started with his career. He wants to be able to save and invest for the future and for his retirement so we welcome Brian to the blog!
When it comes to early investments for retirement, it often borders down to 403b vs Roth IRA. Both of these investments have their unique benefits and demerits, while most financial experts will suggest that you fund your Roth IRA to the peak, in order to create a retirement package that can be accessed tax-free, others will advise that you simply go for a 403b because you will only be taxed when you are withdrawing. There are so many factors you should consider when it comes to 403b vs Roth IRA. Your financial adviser may ask you to switch from a 403b to an IRA only when you get stuck and there is a limited amount you can contribute to the retirement plan.
Ideally, there are quite a number of similarities between traditional IRAs and 403bs. If you are eligible for either of these two, you will be required to contribute a maximum allowable amount or percentage of your income to both, which means you need to have a regular source of income before you can participate in any of the two. Most people will find a traditional Roth IRA attractive because of its numerous tax incentives, and in most cases, your financial adviser may advise you to switch from the 403b to the IRA.
Roth IRA vs 403b – The basics
When considering the issue of 403b vs Roth IRA, you should take some time to consider the differences between them as well as the pros and cons of each.
Here are some of the facts you should consider about the Roth IRA plan;
- The Roth IRA eligibility must be met, and the basic rule here is that single income earners who qualify for a Roth IRA must have a total earning not exceeding $118,000. Secondly, married couples can jointly have a Roth IRA, and must have an income not exceeding $186,000 per annum.
- The mandatory Roth IRA contribution is a limit of $5,500, however, if you are 50 years of age or older, you may contribute up to $1,000 extra per year towards the account.
The benefits of Roth IRA over 403b
▪ Withdrawals are always available after a specific period of time, and these qualify for a tax-free incentive.
▪ Tax-free withdrawals commence after the age of 55 ( in most cases, you must be older than 59 to qualify for tax-free withdrawals ).
▪ You have to have your account for only 5 years to be able to withdraw.
▪ You may qualify for a tax-free withdrawal even if you have not reached the minimum age, only when you suffer from a disability, death or when you are purchasing a home for the first time.
▪ With a Roth IRA, you can invest in any financial institution or individual stocks. You have more flexible options of investment types.
▪ Changing your job will not affect your account status.
▪ You can easily purchase a regular and fixed amount at intervals, and there are no forced withdrawals even when you retire.
▪ The minimum yearly contribution to the 403b may reach $18,000, hence it is more suitable for individuals earning higher incomes.
The cons of Roth IRA
▪ Despite all its tax benefits, there seem to be no pre-tax benefits for Roth IRA investors, hence your monthly contributions will be taxed, however, your withdrawals will not. 403bs on the other come with some pre-tax incentives that could make it more desirable for some investors.
▪ You can only qualify for a tax-free withdrawal after the age of 55, hence, younger investors or contributors to Roth IRA will be taxed, when they withdraw earnings before this age.
▪ Having a Roth IRA does not mean you are protected from your creditors.
Other similarities and differences you should consider when comparing 403b vs Roth IRA
Aside from the tax incentives consideration, there are some other factors you may want to consider when it comes to the issue of 403b vs Roth IRA, these include the following;
- One major similarity between the 403b vs Roth IRA is that you can contribute monthly or yearly to both plans as long as you meet the minimum requirements for income provisions.
- It make more sense to switch to a Roth IRA, especially when you are faced with a complicated and lousy investment choices with your 403b.
- If you are lucky enough to get matching funds from an employer, 403b plan may make more sense.
- As a younger income earner, it may be difficult for you to meet the minimum regular contribution to the 403b, and that means you have less chances of qualifying for pre-tax savings. The Roth IRA may make more sense because of the lower monthly or yearly contribution as well as the investment vendor flexibilities.
- Some financial experts suggest that you should split your investment between the two options if you can meet up with the minimum requirements.
What is the difference between the main IRA and Roth IRA?
The main difference between the traditional IRA and Roth IRA is that the traditional IRA is tax deductible, especially on state and Federal tax returns, in any given year. The withdrawals in retirement are taxed only at ordinary income rates. On the other hand Roth IRA comes with no tax breaks on regular contributions, however, earnings and withdrawals from this plan are generally tax-free. For this reason, you may want to consider Roth IRA because you wouldn’t get taxed when you withdraw after the age of 55.
The difference between IRA vs 403b
The 403b can be an ideal plan to save for your retirement, and it can also supplement other forms of retirement plans, or it can work as a stand-alone plan. Your contributions to the 403b will continue to grow tax-free until the withdrawal period. At the time of withdrawal, the money will be taxed as ordinary income, hence the taxes are generally low, whereas, withdrawal of earnings from your Roth IRA plan will be completely tax-free.
Another major difference between 403b and IRA is that 403b plans will allow individual investors or contributors to invest in certain funds (mutual funds for instance), with the use of a custodian account. For this reason, a younger person, with little or no income can make use of a custodian account from his or her parent or guardian, in order to invest in a 403b. This type of 403b is referred to as “Non-ERISA” plan, and it gives individuals with lower income the opportunity to operate a joint 403b account. Ordinarily, the 403b plan will require an annual contribution of at last $18,000. Custodian accounts will simplify this process for lower income earners and this opportunity is not available on IRAs or Roth IRAs.
Another major benefit of the 403b plan is that employees of certain tax exempt organizations, such as school admins, school personnel, red cross organizations, and researchers, all of which are eligible to participate in this plan. These groups may not qualify for some other investment or retirement plans. The problem with this plan is that your employer may restrict your access to it, based on the numbers of hours you spend, and for this reason, you must be employed in a full time position in order to be part of this plan.
Just before it was named as 403b, it was referred to as “Tax Sheltered Annuity”. This name gave one the impression that members can only invest in annuity products. Since 1974, participants in this type of plan can now invest in other products such as mutual funds, especially through custodian accounts, thus making it easier to spread investment risks. A 403b is different from other pension schemes because eligible employees are usually enrolled automatically in pensions, whereas the 403b plan is voluntary.
403b is also different from pension funds or plans such as 401b because payout in most pensions is based on several factors such as years of service, as well as age of retirement. This is not the case with 403b.
Which plan is more suitable for you?
Only you can make the right decision when it comes to the issue of IRA vs 403b. Financial experts suggest that you should make a rough sketch of what your future tax bracket will look like and whether the tax deduction is worth more to you presently than a tax-free income in the nearest future. Regardless of the choice you make, it is important that you start investing in any of these plans as soon as possible. You may want to consult with a financial expert in order to make the right decision. One single plan is not suitable for everyone, however, when your options and benefits are presented to you, then you can choose the most ideal plan for your needs.
Nice job Brian and I hope you aren’t freezing your butt off in Minnesota right now! This is a nice informative article as most people only assume a 401k or an IRA when people talk about retirement accounts. Similar to the way our other guest poster Bobby mentioned in his article, there are plenty of other options as far ar retirement account go. While making money in a retirement account is more challenging that a regular account due to everything having to be cash secured, saving for the future is very important and having assets grow tax free never hurt anyone. While the following advice might now be perfect for everyone, we suggest maximizing contributions in as many retirement accounts as possible.