Can I Contribute to a 403(B) & a Roth IRA?
Qualified retirement plans generally fall into two categories: tax-deferred plans and after-tax plans. Tax-deferred plans, including 403b plans, offer a deduction for your taxable income in the year of the contribution but withdrawals are taxed. After-tax plans, including Roth individual retirement accounts, do not let you take a tax break for your contributions, but do permit tax-free withdrawals.
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Eligibility Requirements
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As long as you meet the requirements for both a 403b plan and Roth IRA, you can make contributions to both accounts in the same year. The IRS allows any public school employee or employees of other charitable organization to contribute to a 403b plan. For a Roth IRA, you can work for any employer, but your modified adjusted gross income cannot exceed the annual limits. The MAGI limits change annually and differ depend on your filing status.
403b Plan Advantages
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The 403b plan allows you to contribute a larger amount per year and your employer may elect to match your contribution. As of 2011, the contribution limit for a 403b plan equals $16,500 ($22,000 if 50 or older), which dwarfs the $5,000 ($6,000 if 50 or older) contribution limit for Roth IRAs. In addition, if you pay a higher tax rate in the current year than you expect to pay when taking distributions, the 403b plan's tax deferred savings means greater tax advantages.
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Roth IRA Advantages
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Roth IRAs permit you to save after-tax dollars, which offers a significant advantage over 403b plans if you believe your tax rate will be higher when you take withdrawals than it will be in your retirement years. In addition, Roth IRAs never require you to remove the money from the account while 403b plans make you to start taking forced distributions in the year you turn 70 1/2 or when you retire, whichever comes later.
Benefits of Contributing to Both
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If you contribute the maximum to both a Roth IRA and a 403b plan, you can save more for retirement in tax-advantaged accounts than if you only used one plan or the other. In addition, if you are unsure of whether you will pay a greater tax rate at retirement, you can hedge your bets by putting some of your money in a tax-deferred 403b plan and another portion in an after-tax Roth IRA. That way, you get to take a deduction now for part of your contributions and some of the money will come out tax-free.
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