An In Depth Guide to Roth 403(b) vs Roth IRA

As of a report in 2021, nearly 6 in 10 U.S. hospitals are nonprofit. If you’re one of the many workers who work for nonprofit institutions and government entities, you may have access to a 403(b) plan.

Most 403(b) accounts offer a Roth option, an after-tax account. An after-tax account is an account that allows you to contribute with after-tax dollars. The money in the account grows tax-deferred and typically can be withdrawn tax-free. This feature gives Roth accounts an edge over regular 403(b) plans.

But which is better for you: Roth 403(b) or Roth IRA?

Let’s take a look.

Key Takeaways

• Roth IRA accounts are individual retirement accounts that allow you to contribute to investments on a self-directed basis with after-tax dollars. The contributions are not tax-deductible but grow tax-free and are not subject to taxation upon withdrawal.
• Some nonprofit employers offer Roth 403(b) plans. The money in the account grows tax-deferred and typically can be withdrawn tax-free.
• The choice between a Roth 403(b) and a Roth IRA will come down to your individual circumstances and retirement goals.

Traditional IRA vs Regular 403(b) Plan

Before we look into the difference between a Roth IRA and Roth 403(b), let’s first examine the difference between a traditional IRA and a regular 403(b).

Traditional IRA

Traditional IRAs are individual retirement accounts that, similar to 401(k)s, allow you to contribute pre-tax money to different investments.

Unlike 401(k) accounts, IRA accounts are not employer-sponsored, and individuals can establish an account anytime. You are also not limited to the defined set of investment options as you would through an employer-sponsored plan such as a 401(k).

With a traditional IRA, investments are contributed on a pre-tax basis. The money grows tax-deferred until it is withdrawn in retirement when withdrawals are taxed as ordinary income.

As of 2023, investors can contribute a maximum of $6,500 per year to their traditional IRA accounts or $7,500 if the investor is over 50.

What is a Regular 403(b) Plan?

A regular 403(b) plan, a.k.a tax-sheltered annuity (TSA), is a retirement savings plan offered by nonprofit institutions and some government entities, such as hospitals, schools, and churches.

You can think of the 403(b) plan as the non-profit or government entities’ version of the 401(k) accounts found at for-profit companies. Like 401(k) accounts, a 403(b) plan allows employees to make contributions for retirement through salary deferrals.

A regular 403(b) plan is funded with pre-tax dollars, meaning your taxable income for the year is reduced by the amount of your contribution, potentially lowering your overall tax bill. However, when you withdraw funds during retirement, they are taxed as ordinary income.

For 2023, the combined limit of the employee and the employer’s contributions to a 403(b) plan is $66,000 or 100% of your salary, whichever is lower. This means that the total amount of money that can be put into a 403(b) account, including employee and employer contributions, can be at most $66,000 annually.

Understanding Roth 403(b) and Roth IRA

What is a Roth IRA?

A Roth IRA is an individual retirement account that allows you to set aside after-tax income up to a specified amount each year. The money you contribute to a Roth IRA comes from earned income that you’ve already paid taxes on.

Unlike with a traditional IRA, you don’t get an upfront tax break, but the main benefit of Roth IRAs is that your contributions and the earnings on those contributions grow tax-free and can be withdrawn tax-free in retirement.

As with a traditional IRA, there are limits to the amount of money that an investor can contribute to a Roth IRA per year. For 2023, you can contribute up to $6,500 per year or $7,500 if you are 50 or older, but your income may also limit contributions.

Unfortunately,  Roth IRA income limits disqualify many high earners, such as physicians, from contributing. Specifically, if your modified adjusted gross income (MAGI) is more than $153,000 in the tax year 2023 ($228,000 if married, filing jointly), you can’t contribute to a Roth IRA.

If your income is too high to contribute to a Roth IRA, or you want to contribute more to your Roth account than the contribution limit allows, a Roth 403(b) Plan could be a good alternative.

What is a Roth 403(b)?

Many nonprofit employers that offer 403(b) plans also offer a feature called a “Roth 403(b)” or a “Designated Roth Account” option.

Like a Roth IRA, a Roth 403(b) is funded with after-tax dollars. You pay taxes on your contributions now, so your withdrawals during retirement (including the earnings on your contributions) are tax-free.

Unlike Roth IRAs, there are no income limits affecting your eligibility to contribute to a Roth 403(b). The allowed contributions for Roth 403(b) are also significantly higher than for Roth IRAs.

For 2023, the contribution limit for a Roth 403(b) is $22,500, with an additional $7,500 catch-up contribution allowed for those over 50 years old.

Not all nonprofit employers offer a Roth 403(b) option. You’ll need to check with your human resources department or plan administrator to see if this is available.

Roth 403b vs Roth IRA: Key Differences

Income Restrictions

Roth 403(b)s have no income limits. In contrast, Roth IRAs have an upper limit for how much you can earn in a year and still make contributions.

And unlike the Roth 403(b), which has no income limits, Roth IRAs have an upper limit for how much you can earn in a year and still make eligible contributions.

Here are the Roth IRA income limit guidelines for 2024:

• If you’re single, head of household, or married, filing separately (and did not live with your spouse at any time during the year), you can contribute up to the limit if your modified adjusted gross income (MAGI) is less than $146,000. If your MAGI is between $146,000 and $161,000, you can contribute a reduced amount. If your MAGI is more than $161,000, you cannot contribute.
• If you’re married, filing jointly, or a qualifying widow(er), you can contribute up to the limit if your MAGI is less than $230,000. If your MAGI is between $230,000 and $240,000, you can contribute a reduced amount. If your MAGI is more than $240,000, you cannot contribute.
• If you’re married, filing separately, and living with your spouse at any time during the year, you can contribute a reduced amount if your MAGI is less than $10,000. If your MAGI is more than $10,000, you cannot contribute.
• Roth IRA Contribution Limits for 2024
  – Maximum Contribution: $7,000 for individuals under age 50, an increase from $6,500 in 2023.
  – Catch-Up Contribution: $1,000 for individuals aged 50 and older, remaining the same as in previous years. So those 50 and older can contribute a total of $8,000.

One way high earners can contribute to a Roth IRA despite the current income limit is by using a Backdoor Roth strategy. This strategy allows high earners excluded from Roth IRAs to convert their traditional IRA to a Roth IRA.

Not all 403(b) plans allow in-service rollovers. An in-service rollover, or in-service distribution, is the process of rolling over funds from an active 403(b) plan to an IRA while you’re still employed. It is common to roll over a 403(b) you have at a previous employer to an IRA, but to do an in-service rollover, your current employer’s plan must allow participants to roll your after-tax contributions out of the plan to a Roth IRA, while still participating.

The rules for in-service rollovers vary based on your specific plan and your employer. And if your plan allows for in-service rollovers, some restrictions may apply.

For example, the plan may allow rollovers once you’ve reached a certain age or met other terms and conditions. In addition, there may be limits on the amount that can be rolled over (e.g., you can only rollover vested money) and restrictions on certain types of contributions (e.g., you can only roll over the money you contributed yourself).

For 403(b) plans that allow you to roll over your funds while you’re still working for your employer as an in-service rollover, in general, you must be aged over 59 1/2 to access the funds.

Contribution Limit

For Roth 403(b) plans, if you’re under 50, you can contribute up to $22,500, and $30,000 if you’re 50 or older In 2023.

In contrast, a Roth IRA has a contribution limit of $6,500 for those under 50 and $7,500 if you’re 50 and older. Contributions may be further limited by your income level.

If your 403(b) plan allows for after-tax contributions beyond your annual contribution limit, you can make contributions using after-tax dollars, to a regular 403(b). After-tax contributions let you save up to the total employee and employer contribution limit for the year, as long as your existing employee and employer contributions don’t exceed the annual limit. Note that not all 403(b) plans permit after-tax contributions so you’ll need to check with your plan administrator.

One way to overcome the Roth IRA contribution limit is by using a strategy called Mega Backdoor Roth. With a Mega Backdoor Roth IRA, high-earners can use their after-tax contributions to contribute up to the annual contribution limit in their 401(k) or 403(b).

After-tax contributions refer to the amount of money you contribute to a 401(k) or 403(b) after you’ve reached your 401(k) or 403(b) employee contribution limit. These contributions are made with after-tax dollars so that they won’t reduce your taxable income.

To be clear, you can’t make the after-tax contributions required for a Mega Backdoor Roth until you’ve reached your 401(k) employee contribution limit.

• 2024 Employee Contribution Limit: The contribution limit for employee contributions is $23,000.
• 2024 Catch-Up Contributions: For individuals aged 50 and older, the catch-up contribution limit remains at $7,500, bringing the total contribution limit for those eligible to $30,500.
• 2024 Combined Contribution Limit: The total limit for combined employee and employer contributions is $69,000.

These limits apply to 401(k), 403(b), and Roth 401(k) plans, allowing employees to save more for retirement while benefiting from tax advantages associated with these accounts.

The 401(k), 403(b), and Roth 401(k) contribution limit for 2023 is $22,500 for employee contributions. If you’re age 50 or older, you’re eligible for an additional $7,500 in catch-up contributions, which raises your employee contribution limit to $30,000.

The Mega Backdoor Roth strategy could allow you to roll over $43,500 in after-tax dollars annually into a Roth IRA.

• Roth IRA does not have an employer matching feature. However, many employers who offer 403(b) plans also provide contribution matching programs.

If your employer offers a 403(b) matching program, they will match your contributions to your Roth 403(b) up to a specific limit.

Note that while you contribute to your Roth 403(b) with after-tax dollars, employer-matching contributions are made with pre-tax dollars and employer-matching grants can only be made to a regular 403(b) plan.

This means that while your contributions to a Roth 403(b) can be withdrawn tax-free in retirement, any employer-matching contributions and their earnings are placed in a separate, regular 403(b) account and will be subject to income tax upon withdrawal.

Also, note that employer contributions might have vesting schedules that employees must fulfill before gaining complete ownership of those funds. A vesting schedule is a period of time you must work for your employer before fully owning the employer-contributed funds in your 403(b) account.

There’s also a special “15-year rule” for those with at least 15 years of service with the same eligible 403(b) employer. The “15-year rule” is a special provision for those who have served with the same eligible 403(b) employer for at least 15 years, which allows you to increase your elective deferral limit.

Tax Treatment

• Neither Roth 403b nor Roth IRA provides immediate tax deduction, but both accounts offer tax-deferred growth and tax-free withdrawals in retirement. Both accounts have the same tax treatment of contributions and withdrawals.

With both of these accounts, you are making after-tax contributions. Since the money contributed has already been subject to income tax, your withdrawals during retirement (including the earnings on your contributions) are tax-free as long as you’ve reached the age of 59½ and the account has been open for at least five years.

Let’s consider two scenarios:

Scenario A – Roth 403(b) and or Roth IRA with Expectation of High Tax Bracket in Retirement:

If you’re early in your career and expect your income (and therefore tax rate) to increase over time, a Roth 403(b) and or Roth IRA could be beneficial over a Regular 403(b) and or Traditional IRA.

With the Roth accounts, you pay taxes now when your income is lower. Plus, if there are years when your income will be lower for specific reasons (e.g., working part-time or being laid off), it could be more favorable to contribute to a Roth 403(b).

Scenario B – Regular 403(b) with Expectation of High Tax Bracket Now:

If you’re later in your career and already in a high tax bracket, a regular 403(b) or Traditional IRA might be more advantageous. Your contributions lower your taxable income now when it’s higher. However, if you expect to be in a high tax bracket during retirement, withdrawals from these plans could result in more taxes.

Withdrawal Rules

Money in a Roth 403(b) and Roth IRA account grows tax-free and can be withdrawn tax-free in retirement. The rules for withdrawing from a Roth account are as follows:

• You can begin withdrawing funds from your Roth without penalty once you reach age 59½
• If you withdraw funds before age 59½, you may be subjected to early withdrawal penalties, though certain exceptions are permitted, such as if you become permanently disabled.
• Qualified withdrawals, which are not subject to tax or penalty, are those that occur after you reach 59½ and have held the Roth for at least five years
• Non-qualified withdrawals from a Roth are subject to income tax and a 10% penalty on the earnings portion of the withdrawal.

Investment Options

• Your employer decides all investment options for 403(b) plans. In contrast, a Roth IRA allows investors to contribute to investments on a self-directed basis, offering more investment choices.

Compared to other retirement plans such as 401(k)s, Traditional IRAs, and Roth IRAs, investment options within 403(b) and Roth 403(b) plans are generally more limited.

With a Roth IRA, you can invest in a self-directed manner – meaning that an investor has many investment options, including whatever stocks, bonds, mutual funds, and ETFs they are interested in.

The 403(b) plan, first introduced in 1958 as a tax-sheltered annuity, initially offered only annuities as investment options. While annuities are still available in these plans today, they now typically provide a variety of other investment choices similar to those found in 401(k) plans.

The rules governing 403(b) plans allow for investments in mutual funds and annuities. Your employer determines the specific investment options available to you. While direct investments in stocks are not permitted in 403(b) plans, you can invest in mutual funds that focus on stocks or bonds.

If you want more control over your investments and access to a broader selection of assets, contributing to a Roth IRA account can provide that flexibility.

Required Minimum Distribution (RMD) Rules

Roth IRAs are not subject to RMD rules until the owner dies. On the other hand, Roth 403(b) accounts are subject to the Required Minimum Distribution (RMD) rules, but only for the years 2022 and 2023.

Most retirement accounts are subject to Minimum Distribution (RMD). RMD requires individuals to start taking money from tax-deferred accounts like 401(k)s and IRAs starting at age 72.

Roth 403(b) accounts are subject to the Required Minimum Distribution (RMD) rules, but only for 2022 and 2023. From 2024 onwards, the RMD rules will no longer apply to designated Roth accounts.

However, it’s important to note that for 2023, RMDs must still be taken from these accounts, including those with a required beginning date of April 1, 2024.   Also, while there is a minimum amount you must withdraw, you are always permitted to draw more than this minimum if you choose to.

Unlike Roth 403(b) accounts, Roth IRAs are not subject to Minimum Distribution (RMD)

If the Roth 403(b) account Required Minimum Distributions apply to you, rolling over assets from a Roth 403(b) to a Roth IRA can be a way to avoid taking RMDs.

If you roll over your Roth 403(b) money into a Roth IRA, you can effectively avoid taking RMDs during your lifetime. This strategy gives you more control over when and how much you withdraw from your retirement savings.

Roth 403(b) vs Roth IRA Plan Summary Table

Roth 403(b) vs Roth IRA: Which is right for you?

Both Roth 403(b) and a Roth offer significant tax advantages, but if your employer offers a Roth 403(b) option and you’re also eligible to contribute to a Roth IRA, you’ll want to consider some aspects.

A Roth 403(b) is an employer-sponsored retirement plan, and one of the main advantages of a Roth 403(b) is the higher contribution limit. In addition, many employers offer matching contributions, effectively giving you free money towards your retirement.

However, not all employers offer a Roth 403(b) option, and unlike a Roth IRA, a Roth 403(b) requires you to take required minimum distributions (RMDs) starting at age 73 (though for 2024 and later years, RMDs are no longer required).

A Roth IRA is an individual retirement account you open and fund yourself. Like a Roth 403(b), contributions are made with after-tax dollars, and contributions and earnings can be withdrawn tax-free in retirement.

Compared to Roth 403(b), a Roth IRA offers more flexibility regarding investment options and withdrawal rules. For example, you can withdraw your contributions (but not earnings) without penalty. And unlike a Roth 403(b), there are no RMDs for a Roth IRA during your lifetime.

Roth IRAs have an upper limit for how much you can earn in a year and still make eligible contributions. This is unlike Roth 403(b) plans, which don’t have these limits.

If your employer offers a match on your Roth 403(b) contributions, it makes sense to contribute at least enough to get the full match before contributing to a Roth IRA.

If you’re able to contribute to both types of accounts and your goal is to maximize the amount of money to put away each year towards retirement, contribute to a Roth 403(b) and Roth IRA to take advantage of the unique benefits of each can make sense.

Overall, the choice between a Roth 403(b) and a Roth IRA will come down to your individual circumstances and retirement goals.

FAQs

Can I Have Both a 403(b) and a Roth Individual Retirement Account (IRA)?

If you’re eligible to contribute to a Roth IRA, adding it to your retirement strategy alongside your 403(b) plan and or Roth 403(b)^[b] could offer greater diversification. Here’s why:

• By contributing to a Roth IRA in addition to your 403(b), you can put away more for retirement.
• Your employer decides all investment options for 403(b) plans. On the other hand, a Roth IRA is an individual retirement account offering more investment choices, including individual stocks and ETFs.
• Unlike Roth IRAs, Roth 403(b) accounts have no upper limit for how much you can earn in a year and still make eligible contributions.

Can I Keep My Roth IRA If I Change Jobs?

Yes, you can keep your Roth IRA if you change jobs. Unlike a 403(b) or 401(k) plan, which is tied to your workplace, IRA accounts are not linked to your employer and can be maintained even if you switch jobs.

Can I Keep My Roth 403(b) If I Change Jobs?

Yes, you can keep your Roth 403(b) account if you change jobs. Here are the typical options you have:

1. In most cases, you can simply leave your 403(b) with your old employer. However, if you have a small balance, your employer can force you to do a rollover.

2. You can roll your 403(b) into an IRA. This option will give you the most flexibility and investment choice. It’s also convenient because you won’t have to worry about moving your account again if you change employers in the future.

3. Similar to transferring your old 403(b) over to an IRA, you can move it into your new employer’s 403(b) plan if your new plan allows it.