403b vs. IRA – The Difference Between 403b and IRA

The main difference between a 403b retirement plan and a Roth IRA (Individual Retirement Account) is that anyone can open an IRA but contributing to a 403b is limited to those who are employed by non-profit industries, such as schools, hospitals and cooperatives. Another name for the 403b is a Tax Sheltered Annuity because you do not have to pay taxes on your contributions or the interest that they earn while you are still working. You only pay tax on the money you withdraw from the account after age 59.5.

More information about the 403b

There are certain conditions that have to be met before one can contribute to a 403b retirement plan. First of all, you must be an employee of a non-profit business. The eligible careers are spelled out in section 501c of the US Tax Code and include such jobs as that of a teacher, a nurse and a minister. The employer offers and administers the plan and can choose one of three types of 403b plans:

  1. The employer can offer a Tax Sheltered Annuity in an annuity contract that he/she signs with an insurance company.
  2. A retirement specialist can invest the money in mutual funds.
  3. The employer can open a retirement account in which the funds could be tax sheltered or in mutual funds.

Both the employer and the employees benefit from a 403b plan. The employee benefits from the deferred taxes and the employer benefits because with such a plan in place staff morale remains high.

More information about an IRA

An Individual Retirement Account is a permanent savings account that you open yourself. You also manage the account, but there are restrictions on who can have an IRA. If you are single your annual income cannot be higher than $105,000 and if you are married, your annual income cannot be higher than $167,000. You are permitted to invest no more than $5000 per year and you do have to pay taxes on this money as earned income. The main advantage with an IRA is that since you pay the taxes on the money while you are working, you don’t pay any taxes on the withdrawals.

There are several types of IRA’s that you can choose, but there is only one type of a 403b. The employer also has the option to contribute to a 403b, but this option does not exist with an IRA because there is no employer involvement. You don’t need to earn a specific amount of money to open a 403b, but you do need to have a specific type of employment.