4 Questions to Ask Yourself if You're a Good Candidate for Roth 403b
This blog stems from a popular podcast I did a few days ago - Roth 403b Part 2. My original podcast on Roth 403b's deconstructed what a Roth 403b is and the encore focused more on questions that were presented to me regarding a university Roth 403b plan. Below is a copy of a past blog on my website regarding Roth 403b's, but relevant to you in order to understand who would be a good candidate for a Roth 403b.
The Roth 403b: Is it right for you? 4 questions to ask yourself....
The Roth 403b 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 the following questions, a Roth 403b might be right for you.
1. Will I be in a higher marginal tax rate in retirement than I will be during my working years?
This is a questions 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 403b 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.
- If tax rates stay the same, a traditional or Roth 403b will likely yield the same nest egg after taxes.
- If tax rates rise, paying taxes now through a Roth 403b will likely yield a higher after-tax retirement benefit than a traditional pretax 403b.
- If tax rates decrease, deferring taxes now in a traditional pretax 403b will likely benefit you more at retirement.
2. 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 403b may be a good option. Since any earnings accumulate tax free rather than simply tax deferred, a qualified Roth 403b distribution could provide more cash upon retirement than an equivalent traditional pretax 403b distribution would.
3. Do I want to leave tax-free money to my beneficiaries?
Your beneficiaries may be able to receive your account tax free if you die. Additionally, you can roll Roth 403b funds into a Roth IRA, potentially delaying minimum required distributions from those amounts during your lifetime.
4. Do I make too much money today to invest in a Roth IRA?
Unlike Roth IRA's, there are no maximum income limits for Roth 403b contributions. Even if your income is too high to qualify for a Roth IRA, you can make Roth 403b contributions.
Things to remember.....
- Because 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 pre-tax 403b contribution, because income taxes must be currently withheld and paid on after-tax Roth 403b 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 403b contribution and you are at least 59 1/2 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 form your first Roth 403b contribution.
Contact Greg Shepard at email@example.com
Find informative podcasts related university retirement plans HERE.
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