Roth IRA, 401(k), and 403(b)


The task of planning for retirement can seem confusing, but it doesn’t have to be. You can learn about the different options. But you’re probably wondering – Roth IRAs, 401(k), and 403(b) – Wich one is right for me? The following overview of each might help you make that decision.

The Roth Individual Retirement Account (IRA) is less than 10 years old, but it has been widely used since its introduction. Contributions to this IRA are not tax-deductible, but the funds can be withdrawn tax-free after the age of 59 ½ if the account is five years old or older. The Roth IRA does allow for some early withdrawals without penalty, but you are limited in the amount of money you can contribute, only $2,000 per person for a joint account. If you won’t be retiring for a number of years, this might be a good match for your retirement plan rather than a traditional IRA.

A 401(k) is a defined contribution plan in which the employer makes contributions. The employee may make contributions, but they are not required. The amount of money you can have contributed to a 401(k) is considerably larger than an IRA, so they may have an advantage if your employer offers them. They also have the benefit of being transferable should you ever leave your current job. These funds may be left as they are, moved to a new 401(k) plan with your new employer, they may be rolled over into an IRA, or they may be dispersed as a lump sum. Remember, however, if you take the lump sum you will have to pay a penalty for early dispersal.

The 403(b) plan is similar to the 401(k) except that it is restricted to employees of educational institutions or staff of non-profit organizations (501(c)(3)s as determined by the Internal Revenue Service). They are tax-deferred until the funds are withdrawn, and are generally an addition to the normal pension plan that educational employees and non-profit organizations give their employees. Having a 403(b) will not affect your social security benefits, and this plan can be used by part time employees as well. This plan does not allow you to move your account without paying penalties, unlike the 401(k).

These short overviews for the Roth IRA, 401(k), and 403(b) plans are not exhaustive, but they might help you answer the question, “Roth IRAs, 401(k), and 403(b) – which one is right for me?” The person who can best answer that question, however, is a trained professional such as a financial planner or counselor. Remember, ultimately the choice belongs to you. Listen to the advice and then you choose based on the information you understand.

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