Difference Between 403b and IRA

403b vs  IRA

There are several types of retirement plans; 403b and the IRA are two of them. Here are some of their features:

403b

403b plan is a retirement plan wherein the contributions are not taxed until they are withdrawn upon retirement. 403b plans can either be qualified or unqualified plans. It is covered by the Employee Retirement Income Security Act (ERISA) wherein employers are required to contribute to employee accounts.

With a 403b plan, all employees can make salary deferred contributions and the IRS requires simpler and cheaper annual reporting requirements. It has a tax sheltered annuity plan and allows withdrawal even if the plan holder is less than 59 years old. He only needs to show proof of disability, separation, or financial hardship.

Contributions to a 403b plan are invested in a variety of ways. One is through an insurance company that will invest them in an annuity plan. Another is through having a custodian who will invest them in mutual funds. The third is through creating a retirement account to be invested in annuities or mutual funds.

An employee can contribute any amount he wants to a 403b plan and for those that are over 50 years old; they can catch up by giving additional contributions. Retirement plans from previous employers can also be incorporated into the new 403b plan.

A tax free loan can be made on a 403b plan, provided that it is paid back within five to ten years. So, aside from reducing their taxable income, they can use their contributions whenever they need funds.

IRA

Individual Retirement Arrangement (IRA) is a retirement plan that provides tax advantages to its holders. It can either be a trust account for taxpayers and their beneficiaries or individual retirement annuity that allows taxpayers to purchase annuity or endowment contracts from an insurance company.

Plan holders can only borrow from his IRA account for a two month period within a year. It does not enjoy any special tax treatment but it receives the same protection as other retirement plans.

IRA has several types, namely:

. Roth IRA, wherein contributions are made with after-tax assets.
. Traditional IRA, wherein contributions are either tax deductible or non tax deductible. Contributions are deposited before tax.
. SEP IRA, wherein a small business or self-employed individual is allowed to make retirement plan contributions into a traditional IRA established in the employee’s name, instead of in the company’s name.
. SIMPLE IRA, which is an employee pension plan that allows both employer and employee contributions with lower contribution limits and which is simpler.
. Self-Directed IRA, which allows the account holder to make investments on behalf of the retirement plan.

Summary

1. 403b plans are taxed only upon withdrawal when the plan holder has already retired, while IRA contributions are either tax deductible or non tax deductible.
2. 403b plans allow plan holders to get a tax free loan on their plans which is payable in 5-10 years, while IRA plan holders can only borrow from his contributions for two months in a year.
3. 403b funds are invested in various enterprises, while IRA funds are invested in insurance companies.

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