A 403(b) plan is a retirement account that is offered to public school employees and the personnel of non-profit organizations, as well as some ministers and hospital employees. The 403(b) plan is similar to a 401(k) retirement account.
Employees who are eligible for a 403(b) plan also have the option of opening a Roth IRA. Individuals who are debating a 403(b) versus a Roth IRA must consider the tax advantages and disadvantages of both plans.
A 403(b) plan deducts contributions from a participant’s paycheck before federal taxes are calculated. An individual who earns $3,000 in a pay period and who falls into a 15 percent tax bracket pays $450 in federal income tax if there are no deductions. If that same individual contributes $500 to a 403(b) plan, the tax is calculated on an income of $2,500, bringing the tax bill to $375. Using these calculations, the 403(b) participant makes a significant retirement account contribution and saves $75 in taxes. Because the 403(b) contributions are not taxed when they are made, individuals must pay taxes on the withdrawals they make in retirement. The tax rate on those withdrawals is based on whatever tax bracket the participants fall into when the withdrawals are made.
Individuals who contribute to a Roth IRA pay taxes on their full income before the Roth contribution is deducted. In the example above, the individual who contributes $500 to a Roth IRA still pays the full tax bill of $450. Because the Roth contribution was taxed before it went into the account, however, the participant does not have to pay taxes when the money is withdrawn during retirement.
When considering a 403(b) versus a Roth IRA, employees must think about their financial needs now and in the future. A 403(b) plan saves on taxes immediately, putting more money in the pockets of employees who may need the income right away. A Roth IRA saves on taxes later, which is important to individuals who make more money in their later years, placing them in a higher tax bracket.