IRAs and 403(b)s: Perfect Together
March 21, 2026
By Barbara O'Neill, CFP®, AFC®
The more retirement savings accounts people fund during their working years, the more streams of income they will have when they retire. Retirement savings options for 403(b) plan participants include a defined benefit pension, Social Security (earned from a public sector job and/or “side hustles”), their 403(b) qualified employer savings plan, taxable (bank/brokerage) accounts, and individual retirement accounts (IRAs).
IRAs are a complimentary retirement savings vehicle for 403(b) plans. This post will describe traditional and Roth IRAs, similarities and differences between 403(b)s and IRAs, retirement savings plan priorities, selecting 403(b) and IRA investments, transferring money between 403(b)s and IRAs, and income tax rules for required minimum distributions (RMDs) and qualified charitable distributions (QCDs).
It concludes with a discussion of research with recent data about IRA holdings, three “need to know” facts, and six take-away action steps.
IRA Basics
An individual retirement account enables workers with earned income (salary from a job or net earnings from self-employment) to save for retirement. Participation in a 403(b) plan is immaterial. In fact, plan participants can fully “max out” both a 403(b) and an IRA if they can afford it. Maximum contributions for each plan are indexed annually for inflation.
What are now called traditional IRAs were established in 1974 with the passage of the Employee Retirement Income Security Act (ERISA). Originally designed for workers without employer-sponsored pensions, they became widely available to all working taxpayers in 1982 and are funded with before-tax dollars. Roth IRAs, funded with after-tax dollars, became available in 1998.
IRAs are not an investment, per se, but, rather, a retirement savings plan classification for tax purposes. Actual investments can be in stocks, bonds, mutual funds, exchange-traded funds, certificates of deposit, and more. Arrangements to open an IRA account can be made with “brick and mortar” and online brokerage firms, banks, and mutual fund companies. Minimum deposits required to set up an IRA vary among financial institutions and by type of investment (e.g., a mutual fund with a $1,000 minimum deposit).
IRA Tax Laws
Federal tax law limits 2026 contributions to a traditional IRA, Roth IRA, or combination of both to $7,500 for workers with earned income. An additional $7,500 can also be saved for a worker’s non-working or low-earning spouse, provided they file a joint tax return. The working spouse must have sufficient earned income to cover the total IRA contributions for both spouses. In addition, workers or spouses who are age 50+ can contribute an additional $1,100 catch-up contribution ($8,600 total).
For 403(b) plan participants enrolled in an employer savings plan, the tax-deductibility of traditional IRA contributions depends on household income. In 2026, the phaseout income ranges for covered workers are $81,000- $91,000 for singles and $129,000- $149,000 for married couples filing jointly. If IRA account owners are not covered by an employer plan but their spouse is, the phaseout range is $242,000-$252,000.
Annual IRA contributions can be made from January 1 of each year to the tax filing deadline (typically April 15) of the following year either as a lump sum or in installments. The earlier taxpayers make a contribution, the faster their deposit begins to earn compound interest.
Roth IRAs
Roth IRAs allow taxpayers to invest after-tax dollars (money that has already been taxed) for retirement. Although contributions to a Roth IRA are not tax-deductible, earnings grow tax-deferred and withdrawals are tax-free if made more than 5 years after the Roth IRA was established and the taxpayer has reached age 59½. Another big plus is that, unlike traditional IRAs, investors in Roth IRAs are not subject to RMD rules.
Roth IRAs also add tax diversification (spreading assets across accounts with different future tax treatments) to pre-tax 403(b)s by providing a different tax treatment in retirement. Having both account types means retirement savings is taxed in different ways. Roth IRA funds can be withdrawn in higher-income years to avoid being pushed into a higher tax bracket or paying IRMAA Medicare surcharges.
Full Roth IRA contributions are available to all workers with earned income, regardless of age, providing their adjusted gross income (AGI) is under $153,000 for singles and $242,000 for joint filers in 2026. The contribution limit is phased out (i.e., prorated) between AGIs of $153,000 and $168,000 for singles and $242,000 and $252,000 for couples filing jointly.
A backdoor Roth IRA is a strategy for high-income earners. They make a nondeductible contribution to a traditional IRA, then immediately convert it to a Roth IRA. Careful reporting on IRS Form 8606 is essential.
Roth Conversions
A Roth conversion is the transfer of money from a traditional IRA to a Roth IRA. The converted amount is taxed as ordinary income in the year of conversion, but future qualified withdrawals from the Roth IRA are tax-free. People typically do Roth conversions to create tax diversification, reduce future RMDs, hedge against higher future tax rates, and leave tax-free assets to heirs.
Good times to convert to Roth IRAs are low-income years in a lower tax bracket, after retirement but before RMDs begin, and during market downturns. Converting at these times means paying tax at a lower rate.
When the market drops, your retirement account balance is temporarily lower. If you convert to a Roth during that time, you pay taxes on a smaller value. Later, when the market recovers, growth happens inside the Roth IRA and future qualified withdrawals are tax-free.
403(b) and IRA Similarities
403(b)s and IRAs are alike in the following ways:
- Retirement Savings Purpose- Both plans encourage long-term savings, not short-term investing
- Tax Advantaged Growth- Retirement accounts grow tax-deferred (traditional) or tax-free (Roth)
- Annual Contribution Limits- Both plans have annual contribution limits and catch-up contributions
- Early Withdrawal Penalties- Both plans generally impose a 10% penalty for withdrawals before age 59½
- RMDs on Traditional Accounts- RMDs must begin at age 73 or 75, depending on year of birth
- Income Tax on Withdrawals- Withdrawals from traditional accounts are taxed as ordinary income
- Beneficiary Designations- Both plans allow owners to name beneficiaries to inherit an account at death
- Rollover Flexibility- Transfers are allowed between 403bs and IRAs when changing jobs or retiring
- RMD Consolidation Rules- Both plans have tax rules allowing combined RMDs for multiple accounts
403(b) and IRA Differences
403(b)s and IRAs differ in the following ways:
- Account Source- 403(b)s are set up by employers and IRAs are opened by individuals
- Eligibility- 403(b)s are open to nonprofit/school employees; IRAs are open to anyone with earned income
- Contribution Limits- 403(b)s have significantly higher contribution limits and catch-up contributions
- Investments- 403(b)s are limited to plan vendor offerings while IRAs offer broader flexibility
- Delayed RMDs- Traditional 403(b) RMDs may be delayed if still working; not so for RMDs for IRAs
- Loan Provisions- 403(b)s may allow participant loans but IRA loans are not permitted
Which Plan Gets Funded First?
The short answer: “it depends.” Most 403(b) participants do not receive employer match so the conventional wisdom to fund employer plans first to earn maximum matching funds does not apply.
If employees only have access to high-expense 403(b) vendors with fee-laden investments, the best advice is generally to invest elsewhere. Better options are Roth and/or traditional IRAs invested in low-cost index funds or exchange-traded funds (ETFs) at low cost vendors, health savings accounts (HSAs), if eligible (high-deductible health plan), a taxable (bank/brokerage) account, and/or a 457(b) plan, if available.
Selecting 403(b) and IRA Investments
IRA investments can complement those in a 403(b) plan, thereby increasing diversification, and reducing overall portfolio expenses. Many 403(b)s offer a limited menu, typically heavy in high-expense annuities and mutual funds. An IRA provides access to low-cost index funds, ETFs, individual stocks, or bonds not available in a workplace plan. For example, a plan participant might hold a target-date fund in a 403(b) for simplicity and use an IRA to buy a small-cap index fund or international ETF.
Transfers Between 403(b)s and IRAs
A rollover between tax-deferred plans is the movement of funds from one qualified account to another without triggering income taxes or penalties. The tax-deferred status of the money is preserved. Funds are sent directly from one account trustee to another to avoid mandatory tax withholding and reduce the risk of error.
Rollovers between IRAs and 403(b) plans can be a useful tool for retirement planning.
Rolling money from a traditional IRA into a current employer’s 403(b) (assuming the plan accepts roll-ins) can be helpful for someone planning to work past age 73 and wanting to use the “still working” exception” for RMDs. RMDs on the transferred money may be postponed while the individual remains employed.
Conversely, rolling assets from a 403(b) to an IRA, generally only after separation from service, provides broader investment choices and lower fees. Investors may also gain access to tax-saving strategies like QCDs (after age 70 ½) that can satisfy RMD requirements and exclude the distributed amount to charity from adjusted gross income. This may lower Medicare premiums and avoid the net investment income tax.
RMD Consolidation Rules
Tax rules allow some flexibility in how required minimum distributions (RMDs) are taken from IRAs and 403(b) plans. For traditional IRAs, an individual must calculate the RMD separately for each IRA, but the total amount for all RMDs may be withdrawn from any one IRA or from a combination of IRAs.
If an individual owns multiple 403(b) accounts with different vendors, the IRS requires that RMDs be calculated separately for each account. However, once those individual RMD amounts are calculated, they can be aggregated and the total of all 403(b) RMDs may be withdrawn from just one 403(b) account or split among several 403(b)s in any proportion.
Importantly, RMDs from IRAs cannot be satisfied using 403(b) withdrawals, and vice versa.
QCDs for Traditional IRAs
With QCDs, taxpayers aged 70 ½ and over can donate money from their traditional IRA to a qualified charity. The QCD reduces the balance in their IRA prior to reaching RMD age (73 or 75) or counts toward their RMD withdrawal later. The distribution is made directly from the IRA custodian to the charity. The maximum annual contribution for QCDs in 2026 is $111,000 or $222,000 for a married couple.
Research Results
A 2022 study by ICI Research noted that 37% of U.S. households owned IRAs. More than 80% of IRA-owning households also had employer-sponsored retirement savings plans or pensions. Rollovers from employer plans have fueled the growth in IRAs with over half (57%) of traditional IRA-owning households indicating that their IRAs contained rollovers from employer-sponsored plans.
The three most common primary reasons for rolling over were not wanting to leave assets behind at a former employer (25%), wanting to consolidate assets (22%), and wanting more investment options (13%).
Three (More) Things
- Tax preparation is history based on past financial transactions while tax planning is looking ahead.
- RMDs are inevitable if you have a tax-deferred traditional IRA (except for QCDs) or employer plan.
- If you are uncertain about your future retirement tax bracket, you can fund both a traditional and Roth IRA.
Six Smart Strategies
No. 1: Practice Tax Diversification — Save for retirement in a combination of tax-deferred, tax-free, and taxable accounts that are taxed differently.
No. 2: Use the Back Door — Consider funding a Roth IRA indirectly, as described above, if your income is too high to contribute directly.
No. 3: Do the Math — Run the numbers with online calculators and personal data to see if a Roth IRA conversion makes sense.
No. 4: Finish the Paperwork — Be sure to list your beneficiaries on the new account when you are completing a retirement account rollover.
No. 5: Reconsider Your Options — Consider stopping contributions to, or pulling out of, a high-cost 403(b) and funding a Roth or traditional IRA.
No. 6: Keep Good Records — Save annual statements for your 403(b) and IRA and all documents related to a rollover transaction.
In Summary
403(b) plans and IRAs are both tax-advantaged retirement accounts that allow pre-tax or Roth contributions and tax-deferred growth. They have both similarities and differences and complement each another. Together, they can enhance tax and investment diversification and retirement planning flexibility.
This post provides general personal finance information and does not address all the variables that apply to an individual’s unique situation. It should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.
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Dr. O'Neill is the owner/CEO of Money Talk: Financial Planning Seminars and Publications where she writes, speaks, and reviews content about personal finance. She is a Distinguished Professor Emeritus at Rutgers University and a long-time 403(b) plan participant.