403(b) and/or Roth IRA? It's no secret that many teachers and non-profit workers have poor 403(b) choices available to them. This is particularly true at the K-12 level where in many cases only high-fee insurance products are available. If you find yourself in a situation where only high fee products are offered (the average variable annuity charges 2.5% compared to the average index mutual funds that charges about 0.2%) it may be wiser to shun the 403(b) in favor of a Roth IRA — if you meet income eligibility (explained below).     In a perfect world eligible employees would fund both retirement vehicles — a 403(b) and a Roth IRA — annually to their maximum. Furthermore, in a perfect world investors would have outstanding 403(b) vendor choices and matching employer contributions. Doesn't sound like our world. Does it sound like yours?   Let's look at the two retirement plans...   Who is eligible to contribute to a 403(b)?   Employees of public schools and certain tax-exempt organizations — as determined by Section 501(c)(3) of the Internal Revenue Code.     Who is eligible to contribute to a Roth IRA?   Single workers earning up to $101,000. Phases out at $116,000.   Married couples (filing jointly) earning up to $159,000. Phases out at $169,000.     How much can one contribute to a 403(b)? For 2008, workers are able to contribute the smaller of: 1. the new elective deferral limit of $15,500, or 2. up to 100% of includable compensation (must be less than the elective deferral limit), or 3. for those with employer matches or other employer contributions, limits are $46,000 or 100% of compensation (whichever is less). Note: the employee is still limited to the employee elective deferral limit ($15,500 for 2008). An employer can add up to another $30,500. 4. in addition, if you are 50 or older at any time during 2008, you may contribute an additional $5,000.   Note: There is a provision of the Internal Revenue Code that temporarily increases the elective deferral limit for those eligible employees. This increase is known as the 15-year-rule. This special provision increases your elective deferral limit by as much as $3,000 more than the current $15,500 limit (as of 2008). To qualify you must have completed at least 15 years of service with the same employer (years of service need not be consecutive), and you cannot have contributed more than an average of $5,000 to a 403(b) in previous years. The increase in your elective deferral limit cannot exceed $3,000 per year under this provision, up to a $15,000 lifetime maximum. If you have 15 or more years of service with your employer, it is highly recommended that you consult with a tax professional concerning the limits on your contributions.     How much can one contribute to a Roth IRA? For 2008 the limit is $5,000. In addition if you are 50 or older at any time during 2008 you can contribute an additional $500.   Tax advantages of a 403(b)? 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.   Tax advantages of a Roth IRA? 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.   Which plan is right for you? This decision is best left up to the individual, but the following pros and cons should help in the decision making process.   403(b) Pros   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     Roth IRA Pros   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     403(b) Cons   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     Roth IRA Cons   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 lousy investment choices in your 403(b), or are enamored with 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. Now!     Home | Disclaimer | © 2001-2008 bWises Guys, LLC. All rights reserved.				More Resources: Rothira.com