Can You Contribute to Both 403(b) & an IRA?

Those who work for private employers often have access to a 401(k) plan. But those who work for a non-profit or public entity, like a church, school or hospital, often have access to a 403(b) plan instead. If you have a 403(b) plan available through your employer, you can contribute to that plan, and to an IRA as well.

The only form of income you can contribute to a 403(b) is earned income. The money you contribute to a 403(b) plan comes straight out of your paycheck on a pre-tax basis, allowing you to reduce your taxable income and your tax liability. Similarly, the only money that can be contributed to an IRA is earned income. You cannot fund your IRA with interest income, dividend income or any other form of unearned income.

Your 403(b) plan and IRA have different contribution limits. That means you can contribute to both a 403(b) plan and an IRA if both are available to you. The contribution limits associated with both plans are set by the IRS, and they do change from time to time. Be sure to check with the IRS, or with your CPA or tax preparer, before making your annual IRA contribution. For 2010, the contribution limit for a 403(b) is $16,500 for workers 49 years old and younger and $22,000 for workers 50 years old and older. The 2010 contribution limit for an IRA is $5,000 for workers 49 years old and younger and $6,000 for workers 50 years old and older.

Building a balanced portfolio is essential when saving for retirement, and contributing to both a 403(b) and an IRA can help you achieve that balance. If you want to invest a portion of your money in stocks and an additional amount in bonds, you can choose to invest most of your 403(b) in the stock market and most of your IRA in the bond market. You will, of course, need to rebalance your portfolio from time to time to make sure your desired investment mix is maintained as the values of the underlying securities change.

You can choose to complement your 403(b) investment with a traditional IRA, a Roth IRA or a combination of the two. If you choose a traditional IRA, you get an up front break on your taxes, but you will have to pay income taxes at prevailing rates when you retire. If you choose a Roth IRA, you give up that immediate tax deduction, but in return you get the promise of tax-free withdraws when you retire. You can invest your entire annual contribution in one plan or the other, or you can split your contribution between the two types of plans.