Differences between 403(b) vs. Roth IRA + how to choose

The more you get into retirement planning, the more you learn about tax-advantaged retirement accounts — and there are several to know.

But today, we’ll focus on 403(b)s and Roth IRAs. 

A 403(b) is an employer-provided that’s similar to 401(k)s, but they’re only available through tax-exempt organizations like public schools and libraries. 

Roth IRAs are individual retirement accounts specifically funded with after-tax contributions, though traditional (tax-deferred) IRAs are also available. 

Here’s a quick comparison for reference, then we’ll dig into the meat of each plan to help you understand your options. 

What’s a 403(b)?

A 403(b) is an employer-provided plan, like 401(k)s and profit-sharing plans, but it’s specifically designed for tax-exempt organizations like public schools. It’s also known as a tax-sheltered annuity or TSA plan.

Like a 401(k), employees directly contribute part of their salary to their 403(b) account. Employers can also make contributions, and many provide matching benefits as part of your compensation. 

Employee contribution limits max out at $23,000 in 2024 with a $7,5000 catch-up contribution if you’re age 50 or older. Including employer contributions, you can add up to $69,000 total into your 403(b) in 2024. 

A special perk of the 403(b) is an additional catch-up contribution after you reach 15 years of service. If you’ve stuck with the same employer that long, your plan might permit an elective deferral limit increase by the lesser of: 

• $3,000
• $15,000 minus any previous 15-year-service elective deferrals made
• $5,000 multiplied by the number of years you’ve worked for the company, minus total previous elective deferrals

Employers also select a pool of investment options for employees to pick from, so plans vary between employers. 

What’s a Roth IRA?

A Roth IRA is an individual retirement account funded with after-tax contributions.

Unlike a 403(b), anyone can open a Roth IRA. They’re individually owned, which means you can choose your plan provider, select from a wider range of investments, and have total control over your retirement plan. 

While IRAs offer Roth and traditional account options, we’re looking at Roth IRAs specifically. These accept after-tax contributions, which means you pay taxes today and get to cash out in retirement without owing any additional taxes. 

In fact, you can access your Roth IRA contributions at any time without paying taxes or fees. But you have to leave earnings intact. Otherwise, it’s considered an early withdrawal, and you’ll owe a 10% penalty on the distribution (though there are some exceptions). 

While anyone can open a Roth IRA, you can’t directly contribute to the account if you’re a high earner. Here’s the income range at which contribution limits are reduced:

• Single filers and heads of household: $146,000-$161,000
• Married couples filing jointly: $230,000-$240,000
• Married filing separately with a workplace retirement plan: $0-$10,000

If your income is under the lower end of these ranges, you can contribute  $7,000 in 2024, with a $1,000 catch-up contribution kicking in at age 50. This is cumulative across IRAs, so if you have other accounts, a new IRA won’t boost your contribution limits. 

Key differences

We’ve covered a lot of information on these accounts, so let’s simplify it and focus on the differences. Here’s what you need to know if you’re choosing between your employer 403(b) and a Roth IRA.

Eligibility — Roth IRAs are the easiest to get

A 403(b) is employer-provided by tax-exempt organizations. So unless you’re a public school teacher or work for a nonprofit, you might not qualify. But if your employer offers a 403(b) plan, you can enroll and start contributing. Just chat with your manager or HR. 

On the flip side, a Roth IRA isn’t tied to employment at all. You can open a Roth IRA anytime and contribute earned income, as long as your overall earnings are below a certain threshold.

If you earn too much to qualify for a Roth IRA, you could swing a backdoor Roth, which involves rolling over funds from an employer-provided account. Rollovers aren’t considered direct contributions, so you can bypass income limits this way. 

However, this can be a complicated process with multiple steps and tax implications. Work with a financial advisor if you want to explore backdoor Roth opportunities. 

Contribution limits — 403(b)s are your best bet for large contributions

403(b)s take the cake if you’re comparing contribution limits alone. With a $23,000 maximum employee contribution, plus two catch-up contribution options and employee matching contributions, you can contribute up to $69,000 to your account in 2024. 

The IRS permits up to $8,000 in total contributions, including the $1,000 catch-up, across all IRA accounts, but there aren’t any employer-match benefits. Still, $7,000+ to retirement each year isn’t a bad start. 

Tax treatments — Roth vs. traditional accounts

The tax treatment really depends on whether you have a traditional or Roth account. Your 403(b) is likely a traditional account, though some providers permit Roth 403(b)s. A Roth IRA is, naturally, a Roth account. 

You can also open a traditional or Roth IRA, but let’s look at Roth alone for this option. 

You fund traditional 403(b) accounts with pre-tax contributions. That means you reduce your taxable income today and pay less next tax season, but you’ll owe deferred taxes when you withdraw the funds in retirement. Ideally, your income will be lower than it is now, so you’ll pay less tax on the amount. 

Roth IRAs are funded with after-tax income, so they’re not tax deductible. You pay income taxes like usual and your investment contributions grow tax-free. You won’t owe anything to the government when you cash out, as long as you follow the age and time rules. You can even withdraw from your contributions whenever you like, tax- and penalty-free.

This is best if you’re still building your career and expect your income and tax bracket will only increase over the years. 

Required minimum distributions (RMDs) — avoid RMDs with a Roth account

RMDs are an IRS-enforced age at which you have to start taking regular withdrawals from your tax-advantaged accounts. The minimum amount you have to withdraw depends on your account balance and life expectancy.

Traditional 403(b) distributions are required at age 73 or starting the year you retire from the employer providing the 403(b). 

RMDs don’t kick in until after your death for Roth IRAs. Then, your beneficiaries are required to take distributions. Actually, this includes all Roth accounts as of 2024. So, if you have a Roth 403(b), you can delay RMDs for your lifetime. 

403(b) vs. Roth IRA: Which to choose?

Your first step is confirming which accounts you’re eligible to open and contribute to. 

After that, you’re really looking at contribution limits and tax advantages. You can always contribute to both if it fits your goals and budget. But to help narrow it down, we’ll walk you through a few scenarios. 

Do you receive employer-match benefits? Go with a 403(b) 

Employer match contributions are the ultimate retirement perk you don’t want to pass up.

A lot of matching benefits are based on a percentage of your income. They might match up to 50% of your contributions until 4% or so of your salary. 

In this example, you should contribute at least 4% of your salary, which would boost your total annual contributions by 50% without having to invest any more from your own pocket. 

Once you match the employer benefit, you can continue contributions to your 403(b) or opt for an IRA to support your goals with more investment options.

Do you expect to be in a higher tax bracket at retirement? Consider a Roth account

You pay taxes on Roth contributions before the money ever makes it to the tax-advantaged account, which means you won’t owe any taxes when you cash out.

Not all 403(b) providers offer Roth accounts, but if you can access one, this is a great way to grow your retirement tax-free and enjoy the higher contribution limits and employer-match benefits that a Roth IRA can’t match. 

Otherwise, you can open a Roth IRA and invest as long as you fall under the direct contribution income limits. 

Since an IRA is individually owned, you don’t have to worry about pausing contributions or rolling over the funds as you move from employer to employer. 

Have a large budget for contributions? Defer your taxes with a 403(b)

If you’re a high earner and trying to max your retirement contributions, a 403(b) is the way to go.

Traditional IRAs also give you the opportunity to defer taxes, depending on your contributions to an employer-provided account. But, a Roth IRA doesn’t provide any immediate tax benefits. Plus, if you make enough to max out your 403(b) contributions, you might not qualify to contribute to a Roth IRA, anyway.

Prefer to hand-select your investments? Choose an IRA

Employers select a pool of investment options for enrolled participants to choose from, so 403(b) investment options can be pretty limited. 

If you’re interested in hands-on management and want plenty of tax-free investments to choose from, go with a Roth IRA.

You can choose plan providers based on their investments and fees, then further select your investments considering your personal goals and risk tolerance.

This is especially great for experienced investors who want to create a more aggressive portfolio.  

The Playbook take: Mix-and-match accounts for a diverse retirement strategy

Personally, we don’t think you have to choose a single retirement account. In fact, encourage maintaining a few tax-advantaged accounts, if it jives with your budget. With a 403(b) and a Roth IRA, you can enjoy tax breaks today  and in the future. 

You also increase your total contribution limits by using both types of accounts, and you don’t miss out on any account-specific benefits like employer contributions and penalty-free withdrawals on Roth IRA contributions. 

Need help prioritizing your investments? Get a personalized financial plan with Playbook.