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403b vs Roth IRA?

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  • #1

    403b vs Roth IRA?

    Should I fully fund my Roth IRA before my 403b?
    My university offers a 403b (unmatched).
    While the 403b money comes out pre-tax, I'm wondering if I shouldn't
    fund the Roth first?


    We make too much for a deductible IRA, and we're happy with the performance on both the 403b and Roth.
    I wish we had enough money to fund both of these fully, but unless we stop eating, it's not gonna happen!
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  • #2
    A Roth will be a better choice in most cases. There are a few exceptions, for example if you plan to have a significantly lower tax rate when you tap the funds, or if your 403b gives you access to good mutual funds that you wouldn't otherwise have access to (e.g. the funds are closed to new investors, etc.).

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    • #3
      Is it because of the tax-free withdrawals?

      We're already in a pretty low tax bracket with big ole property taxes and other misc deductions.

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      • #4
        Yes. If you're in a low(er) tax bracket, you'll usually want to pay the taxes now. Once the funds are in the Roth, you'll never pay taxes on them again.

        If you're in a high(er) tax bracket right now, you may want to take a tax deduction now, and then pay the taxes when you will presumably be in a lower tax bracket later.

        I choose to do both a 401k and a Roth IRA (not just because my 401k has a match) because I like to hedge my bets in terms of future tax rates.

        There are some estate planning considerations if that is important to you. Also some people like the idea of being able to withdraw their Roth IRA principal at any time without tax or penalty, although that feature can be easily abused.

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        • #5
          Another advantage of the Roth is there are no mandatory withdrawals in retirement. If you don't need the money, you don't have to take it. It can stay there forever and be passed to your heirs.

          And, of course, a Roth is totally in your control. You have essentially unlimited investment options as opposed to the 403b where you are limited to the choices they offer. Plus the Roth stays the same even if you change jobs. No worries about transferring or rolling over the 403b funds.
          Steve

          * Despite the high cost of living, it remains very popular.
          * Why should I pay for my daughter's education when she already knows everything?
          * There are no shortcuts to anywhere worth going.

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          • #6
            Good responses!

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            • #7
              I would use a little of both for tax diversification. $5k in Roth for 2008, plus another $5k in 403b would be a wise move, for example.

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              • #8
                I only wish

                that 5K was" a little"! But such is the life of the underworked overpaid academic.

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