Saving for retirement is one of many financial obligations that people must fulfil to ensure financial stability in the future.
Americans save for retirement in a variety of ways. Today, we would like to compare two popular investment options, one of which is Roth IRA (individual retirement account) and another 403 B plan.
According to Investment Company Institute research, roughly one-third of IRA investors use Roth IRAs to save for retirement and manage their personal finance. A Roth IRA is a retirement plan that you choose to do on your own, and anyone can use it.
A 403(b) plan, on the other hand, is similar to a 401(k) in that it is only available through certain employers. Only non-profit organizations, public school systems, and certain hospitals and churches are legally permitted to use a 403(b) as their official retirement plan.
In today’s feature, we will go through key aspects of both retirement planning choices. You will learn about:
- The aspects of the 403 B plan
- When do you pay taxes with the 403 B plan?
- The nature of Roth IRA
- Tax savings and withdrawal benefits for Roth IRA accounts
- Major differences and similarities between 403 B plan and a Roth IRA
- The alternative for both a Roth IRA and a 403 B plan – The Cash Value Life Insurance
What is a 403 B retirement plan?
A tax-sheltered annuity or TSA plan is another name for a 403(B) plan. These plans are typically provided by public schools and some non-profit organizations. A 401(k) plan is the private company equivalent of a 403(B).
You are still allowed to make 403(B) contributions to a retirement plan and, depending on your employer, may also enable employer contributions to the account. You may apply for 403 (B) plans if you are one of the:
- Church employees
- Public school employees
- Nonprofit organizations
- State college or university employees, etc.
Contributions and earnings from a 403(B) account are pre-tax, meaning any income deferred into the account is not subject to income tax right now (tax-free income). You will also not have to pay taxes on dividends or capital gains as your investment grows. In fact, you won’t find yourself paying taxes until you begin receiving eligible distributions from your 403(B) plans, which occurs when you reach the age of 59.5.
Maximum contribution limits for a 403(bB plan are similar to those for a traditional 401(k). You can contribute up to $20,500 for the 2022 tax year. You can make an additional $6,500 in catch-up contributions if you are 50 or older.
Advantages of the 403 B plans
Tax advantages
Generally, 403(B) accounts have the same tax benefits like 401(k)s and IRAs. Depending on whether you choose a traditional (tax-deferred) or Roth 403(B), you may be able to enjoy a lower tax bill this year in exchange for taxes on retirement income or tax-free withdrawals in retirement. What is more, some plans will allow you to make designated Roth contributions and that way, you receive a tax-free income.
Annual contribution limit
Contribution limits for 403(B) plans are comparable to 401(k) contribution limits and significantly higher contribution limits than IRAs, which is essential in retirement planning.
Employer matching
Sometimes, an employer offers 403 (B) plans that allow extra after-tax contributions. What is more, it happens that the employer matches some of their employees’ personal contributions. However, the employee is still restricted to the elective deferral limit.
Drawbacks of the 403 B plans
A few investment options
Until recently, 403(B)s only offered one type of annuity. While this is no longer true, this type of account provides fewer investment options than a 401(k) or an IRA.
Expensive fees
Some 403(B)s charge higher fees that can eat into your profits, but this isn’t the case with all of them. To avoid this, investigate the plan’s administrative costs and any fees associated with your investments, and try to keep these as low as possible in order to maximize your profits.
Early withdrawal penalties
If you withdraw money from your tax-deferred 403(B) before the age of 59 1/2, you’ll have to pay a 10% penalty. The 403(B) withdrawal tax rate is based on the tax bracket your income falls into ( Internal Revenue Service – IRS limits)
When do you pay taxes?
In a 403(B), scheduled contributions are deducted from your paycheck before taxes are calculated. These are called pre-tax contributions, and they are considered a type of tax deduction, as it lowers the taxable income.
For example, if a person earns $3,000 in a pay period and is in the 15% tax bracket, they must pay $450 in income tax. If the same person contributes $500 to a 403(B) plan, the tax is calculated on a $2,500 income, resulting in a tax bill of $375. Using these calculations, the 403(B) participant makes a substantial retirement account contribution while saving $75 in taxes at the time of contribution (but they “owe taxes”). On the other hand, Roth IRA contributions are always available for tax-free and penalty-free withdrawal.
Because 403(b) contributions are made before taxes, you must pay tax on retirement withdrawals. Distributions can start without penalty at the age of 59.5. The tax rate on those withdrawals is determined by the tax bracket in which your ordinary income is when the withdrawals are made.
Also, the tax advantage of 403(b) plans is that plan asset growth is tax-deferred. This means that all dividends and interest received through the plan grow tax-free until withdrawn as income.
What is a Roth IRA retirement plan?
Taxable income, tax-free withdrawal
A Roth IRA is a type of Individual Retirement Account (IRA). While traditional IRA contributions are tax-deductible, Roth IRA contributions do not allow you to reduce your taxable income. However, once you reach retirement age, your Roth IRA withdrawals will be tax-free. So the main advantage of a Roth IRA is that you are helping your future self by avoiding a higher tax burden in the future. In addition, the Internal Revenue Service has established income limits to ensure that no one takes advantage of the tax-free system.
Roth IRAs are similar to other types of IRAs in that you can open an account without requiring your employer to do so. Because they are individual accounts, they follow you as you change jobs, eliminating the need for rollovers. Banks and other financial advisors can help you set up an IRA.
Pros of the Roth IRAs
No RMD for Roth IRAs
The significant advantage of a Roth IRA is that you do not have to make required minimum distributions (RMDs), as you would with a traditional IRA. That means you don’t have to make withdrawals if you aren’t ready.
Tax-free distributions
You can withdraw funds from a Roth IRA without incurring any taxes or penalties. If you only withdraw what you put in, the money is not taxable, and no penalties apply. This is referred to as a qualified distribution.
Cons of the Roth IRAs
Low contribute limit
Roth IRAs’ contribution limits are much lower than those for 403(B)s. In 2022, you can only contribute $6,000 to a traditional or Roth IRA, plus an additional $1,000 in catch-up contributions for people aged at least 50.
5-year rule (also a pro)
When you withdraw funds from your Roth IRA account, you may be subject to taxation. The percentage that will be taxed is determined by your age. There is no tax or penalty when withdrawing your account if you have met the 5-year rule.
Side by side comparison: 403B vs Roth IRA
We know that we delivered so much information about Roth IRA and 403 (B), so here’s a summary of all the crucial aspects of both plans. It is worth noting that there are no IRS rules (Internal Revenue Service) preventing you from investing in numerous types of retirement account.
A Roth IRA allows you to choose from a wide range of investment options. You can also choose a self-directed IRA. This could provide you with access to gold and real estate.
Participants in 403(B) plans cannot invest directly in individual stocks. However, they can do so through mutual funds. It’s also not uncommon for businesses to provide an annuity contract.
Start saving up for your retirement now
You probably know many investment options like a custodial account with mutual funds, individual stocks or many retirement accounts. Consider managing your personal finance in a new way, most financial advisors won’t tell you about and save money quicker. We’d like to introduce you to a financial planning option: The Infinite Banking Concept.
The Infinite Banking Concept
This concept, also known as over-funded life insurance or cash value life insurance, allows you to operate and borrow money in the same way a traditional bank does without using a third partaker. You will be a creditor as well as a lender.
Instead of borrowing from a bank, you borrow all of the money against yourself, allowing you to control your cash flow while still allowing your whole life insurance policy to earn dividends, although the money is being used elsewhere. In other words, you build wealth by borrowing and repaying the cash value of your permanent life insurance policy.
One of the most significant advantages of a whole life insurance policy is that you will never have to pay banking or loan fees. As a policyholder, you can borrow money by using your policy’s cash value. If you used this borrowing setup, you would never have to borrow money from a bank again. Instead, you would borrow money for yourself (via a whole life insurance policy purchased from the insurance company) and repay it over time. As a result, you have become your own bank.
The goal of IBC is to replicate the process as much as possible to boost the value of your own bank. During the duplication process, money is typically lent and repaid from the cash value of a permanent life insurance policy. In other words, your capital gains are constantly increasing.
Over-funded life insurance allows you to work more efficiently toward your individual and unique financial goals for yourself and your family and have control over your finances without dealing with banking fees or loan interest rates. This strategy entails:
- Overfunding a life insurance company’s high cash value whole life insurance policy (with after-tax funds)
- Accumulation of Cash Value (tax-free) during the time you had your whole life insurance policy for several years.
- Tax-free loans taken against the cash value of your whole life insurance policy for personal use.
You can gain financial independence and control over your money by borrowing for yourself, repaying, and so on – simply by acting as your own bank.
Final thoughts
Investing in retirement savings accounts is the first step to financially securing your future. However, there are alternative ways that will help you achieve pecuniary freedom much earlier – and by that, we mean Over-funded Life Insurance.
Enroll in the Wealth Nation membership program to learn more about the Infinite Banking Concept and how to speed up your retirement savings. Choose financial independence and control over your own lifestyle!