I want to save an extra $100 per month, should I contribute to my 403(b) or an IRA?

This is an excellent and common question. First, let’s clarify that a 403(b) is similar to a 401(k) except that they’re typically for non-profit or government workers. They allow the employee to save before tax dollars that will grow tax free until they are withdrawn after age 59 1/2. They are also unlikely to have a matching component since the employee may also have a pension.

For the sake of answering this question, we’ll assume you have a pension and there’s no match on the 403(b). There are different types of IRAs, so if you don’t earn too much to disqualify you for a Roth IRA (your Modified Adjusted Gross Income is less than $139,000), that would be your best option for an IRA.

So which is better?

To start, if you have a pension and you’re looking to save more beyond that, you’ve made a very smart decision. Saving beyond your pension is the key to a secure retirement. Both options are good and will provide you with tax-deferred growth but I recommend the Roth IRA. The Roth IRA is funded with after tax dollars which means the money will be tax-free when withdrawn after age 59 1/2. This is significant because your pension will likely be taxed (though it varies at the state level) and having money in the Roth IRA will give you levers to pull to keep your retirement income under certain tax thresholds. There are also more investment options available with an IRA.

Go big

The maximum annual contribution for a Roth IRA is $6,000, or $7,000 if you’re over 50. So if you’re able to increase your contribution beyond $100 per month, there’s room to do so while still using the Roth. If you reach the Roth limit, then anything you can save above and beyond that amount can go into the 403(b). The only thing better than having a pension and a Roth IRA is to have a pension, Roth and 403(b)!

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