Save With a 403(b) or Roth IRA. Or Both.

As a teacher, you have some choices in investing for retirement. You can choose to participate in a 403(b) and an IRA, or you may consider forgoing the 403(b) and simply establish an IRA, either traditional or Roth.

Whichever choice you make, you should not pass up this special opportunity to save for retirement with tax-deferred earnings.

An IRA has more, and often better, investment choices than a 403(b) and IRA fees tend to be lower, sometimes significantly so. And while traditional IRAs require you to take withdrawals after you turn 70½, you may have more control over managing how you take those withdrawals than you do with a 403(b).

On the other hand, a 403(b) has much higher contribution limits, which allows you to build your retirement savings faster if you can afford to contribute more than the IRA cap. Investing is also probably easier with a 403(b) as well since all you need to do is sign up: Your contributions are automatically withheld from your pay and direct deposited into the investments you have chosen.

While you do have to set up an IRA with a custodian, once your account is established you can arrange to have money from your paycheck or checking account transferred directly into your IRA on a regular basis.

Like 403(b)s, IRAs have an annual contribution limit: It is $5,500 in 2018, plus a $1,000 catch-up contribution if you are 50 or older.

Ideally, eligible participants would contribute the maximum allowable to both a 403(b) and a Roth IRA. If you are dissatified with your options in the 403(b) plan offered through your school district or only have a limited amount to contribute to a retirement plan, you may want to consider funding a Roth IRA before funding a 403(b). Let's compare these two plans.

  403(b) Roth IRA


Employees of public schools and certain tax-exempt organizations — as determined by Section 501(c)(3) of the Internal Revenue Code.

  • For 2017 single workers earning up to $118,000. Phases out at $133,000.
  • Married couples (filing jointly) earning up to $186,000. Phases out at $196,000.
Contribution Amounts

For 2018, workers are able to contribute the smaller of:

  • The elective deferral limit of $18,000, or
  • up to 100% of includable compensation (must be less than the elective deferral limit), or
  • for those with employer matches or other employer contributions, limits are $53,000 or 100% of compensation (whichever is less). Note: the employee is still limited to the employee elective deferral limit ($18,500 for 2018).
  • in addition, if you are 50 or older at any time during 2018, you may contribute an additional $6,000.


For 2018 the limit is $5,500. In addition if you are 50 or older at any time during the year you can contribute an additional $1,000.

Tax Advantages

Contributions are pre-tax and come directly out of your paycheck. Meaning, in the eyes of the government you've actually earned less (your 403(b) contribution is deducted from your earnings) so you are taxed less. A $100 contribution to a 403(b) reduces federal income taxes by roughly $25 (assuming you are in the 25% marginal tax bracket). In effect, your $100 contribution costs you only $75

No pre-tax advantages, however, withdrawals of contributions are never taxed and are always available for withdrawal. Tax free withdrawal of earnings may begin at age 59-1/2 (account must be held at least five years). Tax free withdrawal of earnings prior to age 59-1/2 may be made in case of disability, first-time home purchase and death.


  • Larger contribution amount
  • Automatically comes out of pay check
  • Built-in dollar cost averaging (purchase of a fixed dollar amount at regular intervals)
  • Lowers taxable income
  • Some plans allow loans
  • Employer matching may be available
  • Earnings grow tax-deferred
  • Offers strong protection from creditors
  • Catch-up provision allows additional contributions




  • Can invest money in any financial institution
  • Can invest in individual stocks
  • Withdrawal of contributions are never taxed
  • Earnings grow tax-deferred
  • Tax free withdrawal of earnings prior to age 59-1/2 may be made in case of disability, first-time home purchase and death
  • Job change doesn't affect account status or require changes
  • Easy to arrange dollar cost averaging (purchase of a fixed dollar amount at regular intervals)
  • No forced withdrawals at age 70 1/2




  • Limited to vendors offered by employer
  • Employers often do a poor job of educating employees about the 403(b)
  • If retired, must begin withdrawals at age 70-1/2
  • Withdrawals taxed as regular income
  • Smaller contribution limit
  • Does not lower taxable income
  • No matching funds
  • Not protected from creditors in all states                                             



Other Things to Consider

  • As long as you don't exceed the income provisions you can contribute to both plans.
  • If you are stuck with unsatisfactory investment choices in your 403(b), or prefer a particular financial institution, funding a Roth IRA may make more sense.
  • If your employer provides matching funds, the 403(b) may be the way to go, at least up to the match.
  • Younger workers may be unable to contribute a significant amount to a 403(b), lessening the benefit of pre-tax savings. In this case the lower contribution total and vendor flexibility may make the Roth IRA the best choice.
  • One school of thought has investors splitting money between the two plans.
  • Uncertainty on future tax rates and policies further complicates the decision.

So which plan is best for you? Only you can make that call. Much of it depends on what you believe your tax bracket will be in the future and whether the deduction is worth more to you today than tax-free income in the future. The real bottom line? Regardless of the plan you choose, get started as soon as you can.

Sources: 403(b)wise and Texas State Securities Board