An individual retirement account and a 403(b) plan are both ways to save money for retirement. However, a major difference is that almost anyone can open an IRA, but 403(b) accounts are limited to employees of nonprofit organizations. An individual can't set up a 403(b). Those must be created by an employer that is a 501(c)3 nonprofit enterprise, a school system, or a religious denomination for ministers.
IRAs and 403(b) programs both allow contributions to be deducted from taxable income, unless those plans were created under the Roth law. Standard IRAs and 403(b)s allow contributions to grow tax-free, but withdrawals after retirement are subject to income taxes. Roth IRAs and Roth 403(b)s tax contributions when they are made, but withdrawals, including earnings, are tax-exempt during retirement.
Another difference between the two retirement plans is who contributes. IRAs generally are personal plans, so all contributions come from the person who sets one up. A 403(b) is an employer-based plan, and often only the employer contributes, although some 403(b) plans allow employee contributions. These can be deferred salary, amounts to match employer contributions, or after-tax contributions.
Contributions to IRAs are limited to $5,000 a year, or $6,000 if the account holder is older than 50. A married account holder whose spouse does not have an IRA can contribute an equal amount for the spouse, boosting the limits to $10,000 and $12,000, or $11,000 if only one spouse is older than 50. The overall limit for 403(b) contributions is $17,000, plus a "catchup" contribution of $5,500 for those older than 50.
Standard IRAs and 403(b)s are both subject to penalties if money is taken out before age 59 1/2. Both also require withdrawals to begin at age 70 1/2, using an Internal Revenue Service formula based on the amount in the fund and the holder's life expectancy. There is a 50 percent penalty if the required amount is not withdrawn; in other words, failure to take out a $1,000 required minimum distribution will incur a $500 penalty. Roth types escape the 70 1/2 rule.
Can Have Both
A participant in a 403(b) plan can also set up a personal IRA, but contribution limits are combined for the two plans. A 403(b) also can be rolled over into an IRA, for instance, if an employee leaves the nonprofit that set up the 403(b). You also can roll one 403(b) into another 403(b) if the new employer's plan allows such contributions.
- IRS: 403(b) Plan Basics
- IRS: Publication 590 (2011), Individual Retirement Arrangements (IRAs)
- IRS: IRS Announces Pension Plan Limitations for 2012
- Money-Zine: Roth IRA versus 403b Plan
- California School Employee Retirement Product Information Bank: Frequently Asked Questions
- Fidelity: Understanding IRAs
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