If you have access to both a 403b and a Roth IRA, you can lower your tax bill substantially while making the most of your retirement savings opportunities. But while many taxpayers can combine both plans, there are some tax considerations at play, as well as the practical limitations of being able to max out both plans. Since 403b contributions are pre-tax and Roth IRA contributions are after-tax, you need to carefully weigh the benefits of both investments.
Roth IRA contributions are subject to income limits. At he time of publication, married couples can contribute to a Roth IRA only if their combined adjusted gross income is less than $179,000, although couples with incomes above $169,000 can make only a partial contribution. For single people, eligibility for a full Roth IRA contribution ends at $107,000, and eligibility phases out completely above $122,000 in income.
You must have earned income equal to or more than the amount you contribute to your Roth IRA. If you do not have sufficient earned income to make the full Roth IRA contribution, you can contribute up to the amount you earned for the prior year. What you cannot do is contribute unearned income like interest or dividends to a Roth IRA.
Both 403b plans and Roth IRA accounts have high contribution limits, so if you re eligible for both plans you can put a great deal of money aside for retirement. For 2011, you could contribute up to $16,500 to a 403b, plus an extra $5,000 if you are 50 or older. In addition, subject to the income limitations, you could possibly contribute up to as much as $5,000 to a Roth IRA, plus an extra $1,000 if you are 50 or older.
If you want to contribute to both a Roth IRA and a 403b, it is a good idea to consider how to make the most of both retirement accounts. If you have the disposable income to max out both plans, doing so can greatly reduce your taxes while helping you maximize your retirement savings. But if you cannot max out both plans, you might want to concentrate on the Roth IRA, since it provides tax-free income when you retire. One popular strategy is to contribute enough to the 403b to get the full company match, then work on maxing out your Roth IRA. Putting more money into your 403b will lower your current taxes, since the money comes out of your paycheck before taxes are assessed. Putting extra money into your Roth IRA does not lower your current taxes, but it helps you build a nest egg you can tap tax-free in retirement.