- You can open and contribute to a Roth IRA independently of your employer.
- Your investment choices are broad.
- You can withdraw money tax-free as a retiree as long as you follow certain rules.
- You can withdraw your contributions without penalty at any time.
403(b) vs. Roth IRA: Cons
Some of the key disadvantages of a 403(b) plan include:
- Your investment choices are limited.
- You pay a penalty for early withdrawals of both contributions and gains.
- You are obligated to pay taxes at your ordinary income tax rate when you receive distributions in retirement.
Some of the key disadvantages of a Roth IRA are:
- You can't contribute to a Roth IRA if your annual income exceeds a certain limit.
- Annual contribution limits are relatively low.
- You must wait until you retire to receive any tax benefits.
- You must comply with the five-year rule to make tax-free withdrawals as a retiree.
Should you open a 403(b) or a Roth IRA?
You don't necessarily have to choose between a Roth IRA and a 403(b) plan.
If your employer offers a 403(b) plan, and your annual income does not exceed the limit for Roth IRAs, you can contribute to both a 403(b) plan and a Roth IRA. Doing so would provide you with a mix of retirement accounts, enabling you to take advantage of both current-year and deferred tax breaks.
If you don't have enough money to contribute the maximum amounts to both types of accounts, then prioritize contributing at least enough to your 403(b) plan to receive the maximum possible matched contribution from your employer. Take advantage of any free money from your employer before putting money into a Roth IRA.
Also, consider your likely tax rate as a retiree. If you expect to be taxed at a higher rate later in life, then a Roth IRA may be your better option.
Your employer may offer a Roth 403(b) plan, to which you may want to consider contributing. While the investment options available through this type of retirement account are limited, much like the investment options for traditional 403(b) plans, Roth 403(b) plans enable you to defer tax savings until retirement, just like Roth IRAs.
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