Is there a difference between an IRA account and a 403B Plan?

I'm not sure if there is a difference between an IRA account and a 403B Plan. My employer currenlty offers a 403B Plan, however I was thinking of also opening a IRA account with my bank? Is it okay to have both accounts or is it only necessary to have one account opened? Do they both provide the same retirement benefit? Also, how much do you think should be contributed to each account?

2 Answers

Relevance
  • Favorite Answer

    The main points...

    + They are similar but different....

    + Tax advantages means you should do one or the other right now...

    + A quick word about the two programs

    + The 403b has higher contribution limit, so I like it better...

    + But in a 403b, watch-out for high the fees...

    + Stick to index funds...

    + You can't do both...

    + A word about consolidating your accounts

    They Are Similar But Different....

    They are similar in that they are both tax deferred retirement plans. The advantage of "tax deferred" is a gift from the government, and you should gratefully accept it; so promise to start one or the other within five minutes of reading this response!

    A Quick Word About The Two Programs.

    The "I" in IRA stands for individual. That is, you own the account. You decide upon the investments. You decide how much (if any) you contribute to it. The good news is that you can invest in anything you like, stocks, bonds, ETFs, etc..., which means you can shop around. Additionally, you can choose the custodian of your IRA, e.g., a fund company like Fidelity or Vanguard, or a brokerage house like Merrill Lynch or Morgan Stanley.

    The 403b is a company sponsored plan, and it is very much like a 401k. (A 401k is for corporations. The 403b is for non-profits.) Your employer "owns" the account, but you are the sole beneficiary. With a 403b, your employer decides on the set of investments available to you, which are limited to only a small mix of mutual funds or annuities, usually to less than six choices, usually include mediocore or good (but not great) investments choices, and sometimes charge high fees..

    Tax Advantages Means You Should Do One Or The Other Right Now...

    The tax advantages are two fold. First, you can deduct your contributions off your income tax, which means you pay less taxes. This is great. Second, as the money grows, you do not have to pay income tax or capital gains until you start to withdraw it (decades from now), which dramatically increases the magic of compounding over the years that you will be working. This is even better. Which ever program you start, you must promie me to contribute the maximum allowable. No matter how much you like your double-lattes, you should do without them to contribute up to the limit... and promise never to touch the money until you retire.

    The 403b Has Higher Contribution Limit, So I Like It Better...

    My off-the-cuff recommendation is for you to participate in your companies 403B plan because it has a higher contribution limit than an IRA, ($15,500 vs. $4,000), but if and only if...

    (1) Your work offers to "matching" some or part of your contributions... this is free money in your pocket.

    (2) Your work offers as one of the available investments a low-fee index fund or ETF.

    But In A 403b, Watch-out For High Fees...

    The downside of some 403b plans is that the company picked bad investment choices... either ones with bad performance, or ones with good performance but wickedly high fees. Be very, very aware of the fees that the fund charges. Do your homework and find-out how much each fund charges in fees. I *strongly* recommend that you invest your money in a low-fee index fund or an index ETF, which usually charges much less than 1.0% in fees. For example, I have a Fidelity S&P 500 Index fund (ticker FSMKX) that charges an amazingly low 0.1%. Unfortunately, most 403b plans do not offer such attractive funds. (More on the poor investment choices in 403bs later...)

    Stick To Index Funds...

    Unless you are over 40, you are probably safe with just one or two index funds; e.g., S&P 500 (large cap) and Russell 2000 (small cap). If you want to be extremely diversified, you can invest into an International mutual fund, but it is not necessary. If you want to keep it simple, just invest in a single S&P 500 Index fund from a reputable fund company. For an index fund, you should pay less than 1% fee, with no back-end or other additional fees. If the funds in 403b program charge

    Stay away from sector funds, because they usually charge high fees, and suffer much more volatility than an index fund.

    Stay away from Insurance Annuities. Like 401k plans, they usually have poor investment choices and charge high fees. Bad choices, usually made by uninformed investors.

    Stay away from "actively managed" funds, because the majority of actively managed funds do not beat the market, and charge fees of over 2%.

    You Can't Do Both...

    The government won't let you contribute pre-tax dollars to both a 403b and a IRA, so if you go with the 403b, you do not to start the IRA. However, if you have other retirement plans from previous employers, like another 403b, or a 401k, etc... then you should *not* leave your money in the plan, and you should *not* rollover the money into the 403b. You should immediately open an IRA, and rollover your old money into it. You want to get your old money out of the more restrictive plans and manage it in a new plan.

    A Word About Consolidating Your Accounts...

    A common mistake is to think that having multiple accounts (and multiple funds) gives diversification to your portfolio... it couldn't be more misleading, because very different "looking" funds might overlap each other and hold the same underlying securities. You can't trust the name or the profile.

    If you invest in more than one mutual fund, then the only way to ensure you are diversified across different accounts is to you a tool like Morningstar's Instant X-ray . This requires a lot of work. A simpler way is to move all of your money into one account, which is what you are considering, and choose a single fund.

    If you have many old 401ks (from former employers), then I recommend that you execute a "direct rollover" all your old 401ks into a single IRA so you can get access to better investment choices. 401ks are notorious for having limited and expensive (high fee) fund choices. Make sure you do a "direct rollover" so you don't pay a tax penalty.

    With your current 401k, you are stuck with whatever investments choices provided by your employers plan.

    I maintain one IRA and a 401k from my current employer. Every time I switch jobs, I immediately execute a direct rollover into my IRA.

    If you have less than $100,000, then you are probably better off selecting either a discount broker, or a fund company (like Vanguard or Fidelity) as the custodian. Full-service brokerages like Merrill Lynch or Morgan Stanley charge all sorts of fees to investors that have less than $100,000. If you have more than $250,000, then you could go for a full-service brokerage and avoid many fees.

    Check-out a "best answer" of mine to a similar question for more information on the differences between a company sponsored plan and an individual one, etc... http://answers.yahoo.com/question/index;_ylt=AvdVv...

    • Login to reply the answers
  • Anonymous
    1 decade ago

    They are different and you can have both.

    Take a look at www.403b.org

    www.ira.com

    www.investopedia.com

    for more info.

    • Login to reply the answers
Still have questions? Get your answers by asking now.