Investing in a 403(b) or a Roth IRA depends on the individual and the anticipated financial situation during retirement. A 403(b) is a plan for employees in school, government, non-profit organizations and churches. A Roth IRA is a retirement account for individuals.
One benefit of a Roth IRA is that the money you withdraw during retirement isn't taxed. The money gets taxed during its accumulation over the years. With a 403(b) account, the money grows tax free, but you are taxed when you begin withdrawing funds.
The decision on which plan to focus on depends on how you think your financial situation will be in your retirement years.
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Roth IRA plans are more flexible when it comes to getting money before retirement. You can remove money at any time, but you would have to pay a tax penalty if you withdraw before age 59 and a half.
Rules may vary with a 403(b) plan, and you would have to discuss it with the plan administrator. A 403(b) allows loans to be taken out of the account, but the loan must be paid back with interest. Also, you might not be able to fund the account until the loan is paid off, slowing down your accumulated savings.
The IRS allows contributions of up to $5,500 for Roth IRAs and $6,500 for people age 50 and older. Account holders of 403(b) plans were allowed to contribute up to $18,000 a year in 2015, a goal helped by employer matching funds.
Many employers of 403(b) plans offer matching contributions, which can build up your savings account quickly and significantly. Money-Zine.com uses an example
of a $5,500 contribution for each plan. By the time a Roth IRA investment is taxed, its value would drop to $3,960. With no taxes on the 403(b) contribution and a $2,750 employer match, the account would be worth $8,250.
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According to Money-Zine.com, over a period of 15 or 20 years, the tax-free money from employee contributions along with employer matching contributions would grow so much in the 403(b) account that it would be more than the Roth IRA account, even after the money in the 403(b) is taxed.
However, growth in your retirement plan also depends on strong and varied investments. Roth IRA holders have more flexibility in investments because of many more options to choose from.
A 403(b) plan is limited in investment choices, which are sometimes expensive, according to certified financial planner Neal Frankle, as reported in U.S. News.
Decisions depend on financial conditions and your age.
Young workers might want to take advantage of the employer matching contributions if available. Other employees might consider putting money into a Roth IRA after their limits are reached in a 403(b) plan.
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