Roth 403(b) vs. Roth IRA

[rowan]

I am going to be starting residency in July, and my program offers a Roth 403(b) plan. I have heard these are good deals for young (but currently poor) residents. However, they do not provide matching funds to resident contributions. My question is, would it be better for me to pass on this institution plan, and open a Roth IRA? I am going to be living in a relatively expensive city, so I don't think I would be able to contribute to both, so I was hoping to get some advice about which would be the smarter investment at this point.

Thanks in advance.

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[Ulquiorra]

My understanding of the Roth 403b and the Roth IRA is as follows:

If you're under the age of 50, you can contribute up to $15,500 post-tax dollars from your paycheck into a Roth 403b in 2008.

If you're under the age of 50, you can contribute up to $5000 into a Roth IRA in 2008.

The funds you divert into the Roth 403b or the Roth IRA do the same thing: you invest them into whatever you want (mutual funds, stocks, bonds, etc), they make (or lose) money, and you can reap the benefits of them without paying taxes on it so long as you meet the various criteria (such as age).

To answer your question, I don't think it matters whether you elect to invest into your employer sponsored Roth 403b or invest into a Roth IRA that you open on your own. You might have a preference if you do or don't like the investment options offered by your employer's plan.

 

[rowan]

Thanks a lot for the info. I'm a rookie at this, but my understanding is that the Roth 403(b) is relatively new, and not offered by all employers. I know the Roth IRA has income limits above which you are no longer eligible to contribute. Does the Roth 403(b) have the same limitations? What if I leave residency and go to an employer that doesn't offer a Roth 403(b)...what happens to the funds in that account?

 

[The White Coat Investor]

If there is no match, max out the roth ira, then put anything extra you can put toward retirement in a Roth 403b.

 

[AndyFromMDTAXES]

Actually, there is a HUGE difference between Roth IRAs and Roth 403bs.

With a Roth IRA, there is no Minimum Distrubition Requirement. That means that you don't need to start drawing down your Roth IRA when you reach the age of 70.5.

With your Roth 403b, there is a minimum distribution requirement. So if you think you might be able to hold off withdrawing money from your 403b until after you reach the age of 70.5, then the Roth IRA might make more sense.

(Please keep in mind that there are a lot of different variables to factor in when making this decision, and my answer only addresses this one specific issue.)

 

[Sol Rosenberg]

I have to second what ActiveDuty had to say. If there is no match with your employer sponsored plan, then definitely max out the Roth IRA. After that, contribute the rest to your employer plan.

The Roth give you flexibility: you can withdraw what you put in without penalty if you have to (great for emergencies), you can choose the funds you want to invest in versus the limited choices offered by your employer, you can enjoy tax free money when you cash out at retirement.

Here's a nice read:
http://poormd.blogspot.com/2008/03/every-resident-must-have-roth-ira.html

??? All of the "flexibility points" you listed are also available with a Roth 403b, as well, with the exception of the number of choices in which to invest (usually.)

 

[zeloc]

What is the difference in what can be invested in? I'm assuming for either that I cannot choose specific stocks, but just a mutual fund or stocks in general or something else?

 

[southerndoc]

What is the difference in what can be invested in? I'm assuming for either that I cannot choose specific stocks, but just a mutual fund or stocks in general or something else?

Depends on your broker. IRA's with TD Ameritrade, E*Trade, etc. can purchase mutual funds, stocks, bonds, etc. in their accounts. Fidelity, T.Rowe Price, etc. offer the same through IRA's (usually more expensive). 401(k)'s are primarily mutual funds only, but some exceptions to apply.

 

[zeloc]

So in general, I say that I want the funds to go toward the purchase of stocks instead of mutual funds, but I don't get to specify which stocks?

 

[Sol Rosenberg]

So in general, I say that I want the funds to go toward the purchase of stocks instead of mutual funds, but I don't get to specify which stocks?

No, you get to pick exactly how your money is invested from the choices that you are given. For most employer-managed (often through a brokerage house) plans like 401k and 403b (either Roth or Non-Roth) plans, a few different mutual funds (6 - 12 in my experience, they usually include one of each type, i.e. index fund, small cap, large cap, international, money market, etc) are offered for you to choose from. This will vary from specific plan to specific plan, however.

For individually managed plans (IRAs) you can invest your money however you want: Cash, Stocks, any Mutual Fund that your IRA custodian trades, etc. It's really not much different than a standard brokerage account in terms of how you can invest your money.

 

[The White Coat Investor]

Actually, there is a HUGE difference between Roth IRAs and Roth 403bs.

With a Roth IRA, there is no Minimum Distrubition Requirement. That means that you don't need to start drawing down your Roth IRA when you reach the age of 70.5.

With your Roth 403b, there is a minimum distribution requirement. So if you think you might be able to hold off withdrawing money from your 403b until after you reach the age of 70.5, then the Roth IRA might make more sense.

(Please keep in mind that there are a lot of different variables to factor in when making this decision, and my answer only addresses this one specific issue.)

Come on Andy. That's not a real issue. You just roll over a Roth 403b into a Roth IRA before 70.5. Most residents utilizing a Roth 403b (most staff docs shouldn't be using a Roth since they're in the highest tax bracket of their life) should roll it over shortly after leaving residency.

Roth 403b up to the match, then the Roth IRA until maxed out, then back to the Roth 403b to the maximum. Taxable investing after that if you're so lucky to have that much income.

 

[AndyFromMDTAXES]

Call me a nitpicker.

Who knows what the rules will be like when down the road, but I'm pretty certain that under the current rules, you can't roll your Roth 403b money into a Roth IRA account. If you do, then the minimum distribution rules will apply to the whole Roth account.

Based on that understanding of the rules, if someone only has $5k or less to invest in retirement accounts, and their income is low enough to allow a Roth IRA contribution, and that person will not lose out on an employer match - then I would recommend that person consider a Roth IRA.

Actually, I like the way you put it better in your second paragraph.

 

[etf]

Call me a nitpicker.

Who knows what the rules will be like when down the road, but I'm pretty certain that under the current rules, you can't roll your Roth 403b money into a Roth IRA account. If you do, then the minimum distribution rules will apply to the whole Roth account.

Based on that understanding of the rules, if someone only has $5k or less to invest in retirement accounts, and their income is low enough to allow a Roth IRA contribution, and that person will not lose out on an employer match - then I would recommend that person consider a Roth IRA.

Actually, I like the way you put it better in your second paragraph.

why wouldn't you be able to roll-over after-tax money from one plan to another?

 

[The White Coat Investor]

why wouldn't you be able to roll-over after-tax money from one plan to another?

I agree. I think you're mistaken Andy. As I understand it, a 403b in this respect is equivalent to a 401K. As soon as you leave the employer, you are eligible to move it to an IRA, and then convert the IRA to a Roth IRA (by paying taxes on it of course.) Since part of a Roth 403b is already after-tax (the employee contribution part), that portion won't be taxed again in the rollover process. I don't believe any RMD requirement accompanies the conversion of a Roth 401K/403b to a Roth IRA. I could be wrong, but I won't believe it unless you cite chapter and verse from IRS.gov.

Pub. 571 Chapter 8 says this about Rollovers:

"Eligible retirement plans. The following are considered eligible retirement plans.

• Individual retirement arrangements.
• Roth IRA
• Qualified retirement plans. (To determine if your plan is a qualified plan, ask your plan administrator.)
• 403(b) plans.
• Government eligible 457 plans.

If the distribution is from a designated Roth account, then the only eligible retirement plan is another designated Roth account or a Roth IRA."

Pub 590 chapter 2 says this:

"Rollovers from other retirement plans. Prior to 2008, you can only rollover (convert) amounts from either a traditional, SEP, or SIMPLE IRA into a Roth IRA. After 2007, you can rollover amounts from the following plans into a Roth IRA.

• A qualified pension, profit-sharing or stock bonus plan (including a 401(k) plan),
• An annuity plan,
• A tax-sheltered annuity plan (section 403(b) plan),
• A deferred compensation plan of a state or local government (section 457 plan), or
• An IRA."

So it sounds like this is a new rule as of this year, but since Roth 401Ks/403bs were just "invented" last year, can't blame them.

And of course, later in the same chapter:

"Must You Withdraw or Use Assets?

You are not required to take distributions from your Roth IRA at any age. The minimum distribution rules that apply to traditional IRAs do not apply to Roth IRAs while the owner is alive. However, after the death of a Roth IRA owner, certain of the minimum distribution rules that apply to traditional IRAs also apply to Roth IRAs as explained later under Distributions After Owner's Death."

So of course there is no Required Minimum Distribution for the owner of a Roth, no matter whether the money funding it came from contributions to a Roth IRA or contributions to a 401K that was rolled over to an IRA and converted to a Roth IRA or contributions to a Roth 403b that was rolled over to a Roth IRA. Readers should be aware that the employer match in a Roth 401K/403b is NOT after-tax, and I'm not entirely clear whether one could just rollover the Roth portion of it into a Roth IRA and the traditional portion into a traditional IRA or whether you'd have to pay the taxes to convert it all.

 

[AndyFromMDTAXES]

You know, I think I might have missed the boat on this one. I spent some time looking into the rules, and I did find that the rules:

1. Mandate a minimum distribution from Roth 401k and Roth 403b accounts, but

2. Do not require a minimum distribution from a Roth IRA.

You would think the IRS would tell us what happens if you roll your Roth 403b money over into a Roth IRA with respect to required minimum distributions. But I couldn't find anything.

I'll make sure to let you know if I find out anything different if and when I have a chance to look a little further into these rules.

 

[The White Coat Investor]

You would think the IRS would tell us what happens if you roll your Roth 403b money over into a Roth IRA with respect to required minimum distributions. But I couldn't find anything.

I'll make sure to let you know if I find out anything different if and when I have a chance to look a little further into these rules.

Ahh...cut em some slack. The IRS can't be expected to think of all this stuff beforehand, can they? Seriously though, I'm sure they'll clarify it in a year or two. But I don't think it would make any sense to require RMDs on Roth IRAs. The point of RMDs IMHO is to make sure the person pays taxes on the money at some point during his life. The money in a Roth IRA (and a Roth 403b) HAS been taxed at some point during his life, hence no need to require RMDs from him (but his heir will still have them.)

 

[dillonkor]

Just want to say thank you for this 10-year-old thread! As a resident I have very small amount available for retirement contribution (<$5k). My employer offers Roth TSA without any match, so I'm facing the exactly same question as the OP.

As I understand the conclusion of this thread and applying to my circumstances, I will open up and max Roth IRA first and Roth TSA the next.

Are there anything different now in 2018 that I should be aware as I proceed with my choice?

 

[RangerBob]

Just want to say thank you for this 10-year-old thread! As a resident I have very small amount available for retirement contribution (<$5k). My employer offers Roth TSA without any match, so I'm facing the exactly same question as the OP.

As I understand the conclusion of this thread and applying to my circumstances, I will open up and max Roth IRA first and Roth TSA the next.

Are there anything different now in 2018 that I should be aware as I proceed with my choice?

One thing to consider is that in many states IRA's do not enjoy the same protection from creditors as 401k/403b's. Of course, if you practice good medicine and have good malpractice coverage, it should hopefully not be an issue, but if you're more the nervous type, it's worth looking into how your state (and future state you plan to settle in) look at IRA's.