If you have access to both a 403(b) and a Roth IRA, you can lower your tax bill substantially while making the most of your retirement savings opportunities. But while many taxpayers can combine both plans, there are some tax considerations at play, as well as the practical limitations of being able to max out both plans. Since 403(b) contributions are pre-tax and Roth IRA contributions are after-tax, you need to carefully weigh the benefits of both investments.
What Is a 403(b) Plan?
A 403(b) plan is typically offered by certain types of employment. If you work for a non-profit organization, church, or maybe a public school, you'll most likely be offered a 403(b) plan as a retirement benefit. It is very similar to a 401k in that they are a matching type retirement plan, with stipulations determined by the employer.
Roth IRA Income Limits
Roth IRA contributions are subject to income limits. At the time of publication, married couples can contribute to the limit to a Roth IRA only if their combined adjusted gross income is less than $198,000, although couples with incomes above $198,000 can make only a partial contribution and it caps at $208,000. For single people, eligibility for a full Roth IRA contribution requires making less than $125,000, and eligibility phases out completely with $140,000 in income.
Earned Income Requirement
You must have earned income equal to or more than the amount you contribute to your Roth IRA. If you do not have sufficient earned income to make the full Roth IRA contribution, you can contribute up to the amount you earned for the prior year. What you cannot do is contribute unearned income like interest or dividends to a Roth IRA.
IRS 403(b) Contribution Limits
Both 403(b) plans and Roth IRA accounts have high contribution limits, so if you re eligible for both plans you can put a great deal of money aside for retirement. For 2021, you could contribute up to $19,500 to a 403(b), plus an extra $6,500 if you are 50 or older.
Combining Your Retirement Accounts
If you want to contribute to both a Roth IRA and a 403(b), it is a good idea to consider how to make the most of both retirement accounts. If you have the disposable income to max out both plans, doing so can greatly reduce your taxes while helping you maximize your retirement savings. But if you cannot max out both plans, you might want to concentrate on the Roth IRA, since it provides tax-free income when you retire.
One popular strategy is to contribute enough to the 403(b) to get the full company match, then work on maxing out your Roth IRA. Putting more money into your 403(b) will lower your current taxes, since the money comes out of your paycheck before taxes are assessed. Putting extra money into your Roth IRA does not lower your current taxes, but it helps you build a nest egg you can tap tax-free in retirement.
Read More: IRS Rules for Terminating a 403b Plan?
Based in Pennsylvania, Bonnie Conrad has been working as a professional freelance writer since 2003. Her work can be seen on Credit Factor, Constant Content and a number of other websites. Conrad also works full-time as a computer technician and loves to write about a number of technician topics. She studied computer technology and business administration at Harrisburg Area Community College.