Roth 403(b) Option

Unlike a traditional, pretax 403(b), the Roth 403(b) allows you to contribute after-tax dollars and then withdraw tax-free dollars from your account when you retire.* The following information can help you decide whether the Roth 403(b) makes sense for you.

Roth Printable flyer

How the Roth 403(b) compares with a traditional, pretax 403(b)

Just as with a traditional, pretax 403(b):

• You elect how much of your salary you wish to contribute
• Your contributions to a Roth 403(b) and traditional, pretax 403(b) cannot exceed IRS limits
• Your contribution is based on your eligible compensation

Unlike a traditional, pretax 403(b), the Roth 403(b) allows you to withdraw your money tax free when you retire.* But it will also require you to make after-tax contributions now

Who might benefit from a Roth 403(b)?

A Roth 403(b) could be a good option for:

• Younger employees who have a longer retirement horizon and more time to accumulate tax-free earnings
• Highly compensated individuals who aren’t eligible for Roth IRAs, but who want a pool of tax-free money to draw on in retirement
• Employees who want to leave tax-free money to their heirs

The Roth 403(b): Is it right for you?

Four questions to ask yourself. The Roth 403(b) was designed to combine the benefits of saving in your tax-deferred workplace retirement plan with the advantage of avoiding taxes on your money when you withdraw it at retirement. If you answer “yes” to some or all of these questions, the Roth 403(b) may be right for you.

Will I be in a higher marginal tax rate in retirement than I will be during my working years?

This is a question that nobody can answer with certainty. Marginal income tax rates have declined over the last two decades. If tax rates were to continue to decline, a traditional, pretax 403(b) might be the better option. The same is true for individuals who expect their marginal tax rate to be lower in retirement as the result of a lower income.

Generally:

• If tax rates stay the same, a traditional, pretax or Roth 403(b) will likely yield the same nest egg after taxes
• If tax rates rise, paying taxes now through a Roth 403(b) will likely yield a higher after-tax retirement benefit than a traditional, pretax 403(b)
• If tax rates decrease, deferring taxes now in a traditional, pretax 403(b) would probably benefit you more at retirement
• Because Roth contributions are under the same IRS limits as pretax contributions to your plan, each dollar of a Roth contribution reduces the amount that can be contributed pretax (and vice versa).
• Your take-home pay will be less than it would be if you made an equivalent traditional pretax 403(b) contribution, because income taxes must be currently withheld and paid on after-tax Roth 403(b) contributions.

Can I afford to maximize my contributions and save up to the IRS limit?

If you can afford it, making maximum contributions to a Roth 403(b) may be a good option. Since any earnings accumulate tax-free rather than simply tax-deferred, a qualified Roth 403(b) distribution could provide more cash upon retirement than an equivalent traditional, pretax 403(b) distribution would.

Do I want to leave tax-free money to my heirs?

Your beneficiaries may be able to receive your Roth account tax-free if you die. Additionally, you can roll Roth 403(b) funds into a Roth IRA, potentially delaying minimum required distributions from those amounts during your lifetime.

Do I make too much money today to invest in a Roth IRA?

Unlike Roth IRAs, there are no maximum income limits for Roth 403(b) contributions. Even if your income is too high to qualify for a Roth IRA, you can make Roth 403(b) contributions.

*In the event of either retirement or termination, your earnings can be withdrawn tax free as long as it has been five tax years since your first Roth 403(b) contribution and you are at least 59½ years old. In the event of death, beneficiaries may be able to receive distributions tax free if the deceased started making Roth contributions more than five tax years prior to the distribution. In the event of disability, your earnings can be withdrawn tax free if it has been five tax years from your first Roth 403(b) contribution.