Is 403(b) Better Than an IRA Account?


Dear Dr. Don,Would you please speak on the benefits and drawbacks of participating in a 403(b)? I've only participated in employer-matched 401(k) accounts, but now I'm with an employer who offers a 403(b) but does not provide any financial matching because they provide a pension. I would like to know if I should participate in the 403(b) and what types of questions to ask the account manager.-- Nonprofit Nuance

Dear Nuance,The advantage of a 403(b) when compared to your IRA options is that it has a higher contribution limit. The most that can be contributed to a 403(b) account through employee elective deferrals by means of a salary reduction agreement for 2011 is $16,500.

Another advantage of the 403(b) can be your investment choices. Some large employers have access to mutual funds that you wouldn't be able to invest in on your own in an IRA account. It can just as easily go the other way, however, where you have limited investment choice in the 403(b) plan and more options in an IRA account. You'd want to learn about the account fees and expenses in the plan, too. The plan sponsor (your employer) may direct you to the plan administrator to discuss these aspects of your firm's plan.

IRA contribution limits for 2011 are $5,000 -- or $6,000 if you are 50 years of age or older by the end of 2011. The maximum deductible contribution to a traditional IRA and the maximum contribution to a Roth IRA may be reduced depending on your modified adjusted gross income and whether you are covered by a retirement plan at work. Given sufficient income, you have the option to contribute nondeductible funds to a traditional IRA and then convert it to a Roth IRA.

You didn't mention where your 401(k) money is being held. You can keep the money invested in the previous employer's plan, place the money in a traditional IRA account, convert the funds into a Roth IRA or place the money with your new employer's 403(b) plan -- if the plan allows rollovers. A direct rollover is the better option so the funds aren't subject to mandatory withholding. If you have company stock in the 401(k) plan, then you'll want to work with a tax professional in deciding how to move the assets because of net unrealized appreciation, or NUA, in the company's stock.

The decision to roll over the 401(k) money into an IRA/Roth IRA, if the balance is large enough, could provide economies of scale to reduce account fees and expense ratios, or to get you preferred investor services such as low-cost financial planning.