What is Roth 403b?

What is a Roth 403b? How does a Roth 403b work?  Higher ed institutions do a bad job of promoting an AWESOME feature in their university retirement plan.  NOTE - MOST higher ed retirement plans allow for the Roth 403b feature, but NOT all.  It's up to you to gain as much knowledge as possible in order to make a more educated decision regarding your financial future.  

Here, I'll discuss the Roth 403b option and all the goodness that comes along with it.  The Roth 403b is an additional way to save in your plan.  Unlike a traditional pretax 403b, the Roth 403b 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 403b makes sense for you.  

How the Roth 403b compares with a traditional pretax 403b...

Just as with the traditional pretax 403b:

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

Unlike a traditional pretax 403b the Roth 403b allows you to withdrawal 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 403b?

A Roth 403b 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 IRA's, 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 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 these questions, a Roth 403b might be right for you. 

1. Will I be in a higher marginal tax rate 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. 

Generally speaking....

• 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 greg@shepardfinancial.com

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S&A Financial Services, Inc. is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.