Is an IRA Better Than a 403(b)? Making the Smart Choice for Your Retirement

You’re not the only one who can’t decide if an IRA or a 403(b) is better for your retirement savings. I’ve spent a lot of time researching retirement options for my clients, and this question comes up ALL THE TIME. It’s especially common for people who work for schools, churches, or nonprofits.

Let’s get into the specifics of 403(b)s and IRAs to help YOU decide which is best for YOU. Spoiler alert: it’s not always an either/or decision!.

Understanding the Basics: 403(b) vs. IRA

Let’s be clear about what these retirement accounts are before we decide which is “better”:

What is a 403(b) Plan?

A 403(b) plan is an employer-sponsored retirement account offered by:

• Public schools and educational institutions
• Non-profit organizations (501(c)(3)s)
• Religious institutions
• Certain government employers
• Some hospitals

It’s similar to a 401(k) but specifically for mission-driven organizations. Many people call it a tax-sheltered annuity (TSA), which is a bit confusing since most modern 403(b) plans offer mutual funds in addition to annuities.

What is an IRA?

An Individual Retirement Account (IRA) is exactly what it sounds like – a personal retirement account YOU open yourself There are two main types

• Traditional IRA: Contributions might be tax-deductible depending on your income and other retirement plan coverage. Investments grow tax-deferred until withdrawal.
• Roth IRA: Contributions are made with after-tax dollars, but qualified withdrawals in retirement (including earnings) are generally tax-free.

Anyone with earned income can open an IRA, regardless of where they work.

Head-to-Head Comparison: 403(b) vs. IRA

Here are some of the main differences that could help you choose between the two:

Why a 403(b) Might Be Better For You

Here’s when a 403(b) could be the better choice:

1. You want to save MORE money for retirement. With a contribution limit of $23,500 in 2025 (compared to just $7,000 for an IRA), you can stash away significantly more in a 403(b).

2. Your employer offers a MATCH. This is literally free money! If your employer matches say, 50 cents for every dollar up to 6% of your salary, that’s an immediate 50% return on your investment. I’d be crazy not to recommend maxing this out first.

3. You like automatic saving. With a 403(b), contributions come straight outta your paycheck before you ever see the money. This “set it and forget it” approach helps many people save consistently.

4. You’re a long-term employee. If you’ve worked for your non-profit for 15+ years, you might qualify for additional catch-up contributions (up to $3,000 per year, $15,000 lifetime max).

5. You’re between 60-63 years old. Starting in 2025, employees in this age range can make “super catch-up” contributions of $11,250 beyond the regular catch-up, bringing their total to $34,750!

Why an IRA Might Be Better For You

On the flip side, an IRA could be your better bet if:

1. Your 403(b) plan has terrible investment options. Unfortunately, some 403(b) plans (especially in public schools) offer limited investment choices with high fees. An IRA gives you freedom to invest in almost anything through a brokerage firm.

2. You want more control. With an IRA, you’re the boss! You pick the provider, the investments, and can move your money whenever you want.

3. You value flexibility for early access. While both accounts generally penalize early withdrawals, Roth IRAs allow you to withdraw your contributions (not earnings) penalty-free anytime.

4. You want tax diversification. A Roth IRA offers tax-free growth and withdrawals in retirement, which can be incredibly valuable if you expect to be in a similar or higher tax bracket later.

5. Your 403(b) has high fees. Some 403(b) plans, particularly older ones, come with layers of fees that can eat into your returns. A low-cost IRA at a discount broker might save you thousands over time.

The Power Duo Strategy: Why Not Both?

Here’s a little secret: the smartest approach for many people isn’t choosing between a 403(b) and an IRA – it’s using BOTH strategically.

My recommended approach for most clients:

1. First, contribute enough to your 403(b) to get the FULL employer match (don’t leave free money on the table!)

2. Next, max out an IRA (preferably Roth if you qualify)

3. Then, if you still have money to save, go back and contribute more to your 403(b) up to the annual limit

This strategy gives you the best of both worlds – employer matching contributions AND investment flexibility.

Real-World Example: Meet Sarah

Let’s look at a hypothetical example:

Sarah is a 35-year-old teacher making $60,000 annually. Her school offers a 403(b) with a 50% match on the first 6% she contributes. She can afford to save about $10,000 per year for retirement.

Here’s her optimal strategy:

• Contribute $3,600 (6% of salary) to her 403(b) to get the full $1,800 employer match
• Max out a Roth IRA with $7,000
• Total retirement savings: $12,400 ($10,000 from Sarah + $1,800 match)

By using both accounts, Sarah maximizes her employer match AND gains the tax-free growth potential of a Roth IRA.

Important Considerations for Your Decision

When deciding between an IRA and a 403(b), don’t forget these factors:

Current Tax Bracket vs. Expected Future Tax Bracket

If you expect to be in a lower tax bracket in retirement, traditional pre-tax contributions (either 403(b) or Traditional IRA) might make more sense. If you expect to be in the same or higher bracket later, Roth options could be more beneficial.

Investment Options and Fees Matter HUGELY

The quality of investment options and fee structure in your specific 403(b) plan could make or break its value compared to an IRA. Some 403(b) plans have fantastic low-cost options, while others are loaded with expensive annuities and high administrative fees.

Ask your plan administrator for a complete fee disclosure and compare it with low-cost IRA providers like Vanguard, Fidelity, or Schwab.

Withdrawal Rules and Flexibility

Both accounts generally restrict access until age 59½, with a 10% penalty for early withdrawals (plus taxes on pre-tax contributions and earnings). However, there are exceptions:

• Roth IRA contributions (not earnings) can be withdrawn anytime tax and penalty-free
• Some 403(b) plans allow penalty-free withdrawals at age 55 if you separate from service
• Both accounts have exceptions for certain education expenses, first-time home purchases, and hardships

The Bottom Line: Is an IRA Better Than a 403(b)?

The honest answer is: it depends on YOUR specific situation. Here’s a quick decision guide:

An IRA is likely better if:

• Your 403(b) has poor investment options or high fees
• You want maximum control over your investments
• You value withdrawal flexibility
• You don’t receive an employer match
• You can only save a small amount annually (under $7,000)

A 403(b) is likely better if:

• You receive an employer match
• You want to save more than $7,000 annually
• You benefit from automatic payroll deductions
• Your plan offers quality investment options with reasonable fees
• You qualify for special catch-up provisions

But remember, for many people, the BEST answer is using both accounts strategically!

Taking Action: Next Steps

1. Check your 403(b) details: Ask your HR department or plan administrator for information about matching contributions, investment options, and fees.

2. Calculate your savings capacity: Determine how much you can realistically save for retirement each year.

3. Consider your tax situation: Think about whether pre-tax or Roth contributions make more sense for your circumstances.

4. Explore IRA options: Research IRA providers to compare investment choices and fees.

5. Talk to a pro: Consider consulting with a financial advisor who specializes in retirement planning, especially if your situation is complex.

The path to retirement security isn’t about choosing the “best” account in isolation – it’s about creating a comprehensive strategy that maximizes all the tools available to you. For most people working in nonprofits or education, that means leveraging BOTH a 403(b) AND an IRA to build the retirement you deserve.

What’s your experience with 403(b)s or IRAs? Have you found one to be clearly better than the other in your situation? I’d love to hear your thoughts in the comments!