What an IRA is and how it differs from a 403(b)

An Individual Retirement Account (IRA) is a savings account you open on your own, not through an employer. Unlike a 403(b), which your employer sets up and may contribute to, an IRA is entirely your responsibility — you choose the bank or investment company, you decide how much to contribute each year, and you control what happens to the money.

The main advantage of an IRA is flexibility. You can open one whether or not your employer offers a retirement plan, and you can have an IRA even if you already have a 403(b). The main disadvantage is that you fund it yourself with after-tax dollars (in most cases), whereas a 403(b) often comes with employer matching or contributions. An IRA also has lower annual contribution limits than a 403(b) — for 2024, you can contribute up to $7,000 per year to an IRA if you are under 50, compared to $23,500 for a 403(b).

If you left a job with a 403(b), you can move that money into an IRA through a process called a rollover. This lets you keep the tax-deferred growth without penalty and often gives you more investment choices than your old employer plan offered.

Key Takeaways

  • An IRA is a retirement account you open yourself, not through your employer, and you contribute your own money rather than relying on employer contributions.
  • The two main types are Traditional IRAs (contributions may be tax-deductible, withdrawals are taxed) and Roth IRAs (contributions are not deductible, but withdrawals are tax-free).
  • You can open an IRA at a bank, credit union, brokerage firm, or mutual fund company — the institution you choose affects your investment options and fees.
  • If you have a 403(b) from a previous job, you can roll it into an IRA to consolidate your retirement savings and often gain more control over how the money is invested.
  • Annual contribution limits are lower for IRAs than for 403(b)s, and you cannot contribute more than you earned in income that year.

Traditional IRA vs. Roth IRA: the tax difference

The two most common IRA types treat taxes differently, and which one makes sense depends on your income now and what you expect it to be in retirement.

A Traditional IRA lets you deduct your contributions from your taxable income in the year you make them — if you earn $60,000 and contribute $7,000, you report only $53,000 as income to the IRS. The money grows tax-free inside the account. When you withdraw it in retirement, you pay income tax on the full amount at whatever tax rate applies then. You must start taking withdrawals at age 73 (as of 2023; this age changes slightly each year under current law).

A Roth IRA works in reverse. You contribute money that has already been taxed — no deduction now. The money grows tax-free, and when you withdraw it in retirement, you owe no tax on any of it, including the growth. You are never required to take withdrawals, and you can withdraw your contributions (not the earnings) at any time without penalty. The tradeoff is that you get no tax break today.

Which is better depends on whether you think your tax rate will be higher or lower in retirement. If you are young and expect to earn more later, a Roth often makes sense because you lock in today's lower rate. If you are in a high tax bracket now and expect to be in a lower one in retirement, a Traditional IRA saves you more in taxes today.

Where to open an IRA and what to expect

You can open an IRA at most banks, credit unions, brokerage firms (like Fidelity, Vanguard, or Charles Schwab), and mutual fund companies. The institution you choose affects what you can invest in and what you pay in fees.

A bank IRA typically offers savings accounts or certificates of deposit (CDs) as investment options — safe, predictable, and low-fee, but with lower returns. A brokerage firm IRA gives you access to stocks, bonds, mutual funds, and exchange-traded funds (ETFs), which offer more growth potential but require you to make investment decisions or pay for professional management. Some providers charge annual account fees; others charge per trade or per fund. Compare fees before you open an account, because they compound over decades.

The opening process is straightforward: you provide your name, Social Security number, address, and employment information. You choose whether you want a Traditional or Roth IRA. You decide how much to contribute (up to the annual limit, which for 2024 is $7,000 if you are under 50). You select your investments if the institution requires it. Most accounts are open within a few business days.

Contribution limits and income restrictions

For 2024, you can contribute up to $7,000 per year to an IRA if you are under age 50. If you are 50 or older, you can contribute an additional $1,000 as a "catch-up" contribution, for a total of $8,000. These limits change each year and are adjusted for inflation.

You cannot contribute more than you earned in income that year. If you earned $4,000 in 2024, you can contribute at most $4,000 to an IRA, even if the limit is $7,000.

Roth IRAs have an additional restriction: your ability to contribute phases out if your income is above a certain level. For 2024, if you are single and earn more than $146,000, you cannot contribute the full amount; above $161,000, you cannot contribute at all. These income limits are higher for married couples filing jointly and lower for married couples filing separately. Traditional IRAs have no income limit for contributions, but the tax deduction phases out if you or your spouse are covered by a 403(b) or other employer plan and your income exceeds a threshold.

Rolling over a 403(b) into an IRA

If you left a job and have money in a 403(b), you can move it into an IRA without paying taxes or penalties — this is called a rollover. A rollover is useful because it consolidates your retirement savings in one place, often gives you more investment choices, and may reduce fees.

There are two ways to do a rollover. In a direct rollover, your old 403(b) provider sends the money straight to your new IRA provider. You never touch the money, and there are no tax consequences. This is the simpler and safer route. In an indirect rollover, the 403(b) provider sends you a check, and you deposit it into an IRA within 60 days. If you miss the 60-day window, the IRS treats it as a withdrawal, and you owe income tax plus a 10% penalty if you are under 59½.

To start a rollover, contact the financial institution where you want to open the IRA and ask for their rollover form. They will guide you through the process and contact your old 403(b) provider on your behalf. The whole process usually takes two to four weeks.

Withdrawals, penalties, and required minimums

In a Traditional IRA, you can withdraw money at any time, but if you are under 59½, you pay a 10% penalty on top of income tax — with some exceptions. Exceptions include withdrawals for a first home purchase (up to $10,000 lifetime), medical expenses above a certain threshold, health insurance premiums if you are unemployed, and may have access to education expenses. At age 73, you must begin taking Required Minimum Distributions (RMDs) — the IRS calculates the minimum amount you must withdraw each year based on your age and account balance. If you do not take the RMD, you owe a penalty.

In a Roth IRA, you can withdraw your contributions (the money you put in) at any time with no tax or penalty. You can withdraw earnings (the growth) before 59½ only in specific circumstances, such as a first home purchase or disability. At age 73, Roth IRAs also require RMDs, though you can avoid this by converting the Roth to a different type of account or by careful planning with a tax professional.

When an IRA makes sense alongside a 403(b)

You might open an IRA even if you have a 403(b) for several reasons. If your employer does not match contributions to the 403(b), an IRA may offer better investment choices or lower fees. If you have already contributed the maximum to your 403(b) but want to save more for retirement, an IRA lets you do that (up to its own limit). If you are self-employed or have side income, you can open a SEP IRA or Solo 401(k) to save that income separately.

You can also use an IRA as a holding place for money from a previous job's 403(b) while you decide what to do with it. Some people keep multiple IRAs open — one for rollovers from old employer plans and another for regular contributions — to keep the accounts organized.

Frequently Asked Questions

Can I have both a 403(b) and an IRA at the same time?

Yes. You can contribute to both in the same year, as long as you stay within each account's annual limit. However, if you have a 403(b) and earn above a certain income threshold, the tax deduction for a Traditional IRA contribution may be reduced or eliminated. A tax professional can tell you whether this affects you.

What happens to my IRA if I die?

Your IRA passes to whoever you named as the beneficiary on the account. They can withdraw the money, roll it into their own IRA, or in some cases stretch withdrawals over their lifetime. Name a beneficiary when you open the account, and review it after major life changes.

Can I move money from my 403(b) to an IRA while I am still working?

It depends on your employer's plan rules. Some plans allow in-service rollovers, which let you move money out while you are still employed. Others do not allow it until you leave the job. Check with your 403(b) plan administrator or your HR department to find out what your plan permits.

What is the difference between a SEP IRA and a regular IRA?

A SEP IRA is designed for self-employed people and small business owners. It allows much higher annual contributions — up to 25% of your net self-employment income, with a 2024 limit of $69,000 — compared to $7,000 for a regular IRA. You must have self-employment income to open one.

Do I have to invest in stocks if I open an IRA at a brokerage?

No. You can choose conservative investments like bonds, CDs, or money market funds. You can also mix stocks and bonds in whatever proportion feels right for your risk tolerance and timeline. The brokerage straightforward provides access to these options; you decide what to buy.