What is a Roth 403(b) Plan?

Knowing the difference between Roth and traditional retirement plans can help you make informed choices about what’s right for you. A Roth
403(b) plan is a retirement plan alternative for educators and school employees. Like a traditional 403(b) plan, it is a voluntary retirement savings plan. The contribution limits and several other features are the same. However, there are major differences.

With a traditional 403(b) or 457(b) plan, you contribute on a pretax basis, so you save on your current tax bill. Contributions and earnings grow tax-deferred. In retirement you will owe the government ordinary income taxes on withdrawals.

With a Roth 403(b), you contribute on an after-tax basis. You pay taxes on your contributions up front, and there is no current tax break. Your contributions and earnings grow tax-free. The major advantage is that withdrawals are tax free as long as the account has been held at least 5 years, and you have a qualified distribution event.

If your employer offers a Roth 403(b), you have a decision to make. Should you pay taxes now or later? The answer depends on your situation. If you expect your tax bracket to be lower in retirement than it is now, it may make sense to contribute to a traditional plan and take advantage of the tax break now. However, if you expect your tax bracket to be the same or higher in retirement, it may make sense to contribute to a Roth 403(b) and benefit from tax-free withdrawals later.

How much can you contribute to a Roth 403(b)?

Effective January 1, 2015, you can contribute 100% of your compensation up to a maximum of $18,000. If you’re age 50 or more you may contribute an extra $6,000. Maximum contribution limits may change in future years as determined by the IRS.

What savings and investment products are available in a Roth 403(b) plan?

If you are eligible to take part in a Roth 403(b) plan, you may choose among different types of investments. You can select a Roth 403(b) provider from the list of approved providers under your employer’s Roth 403(b) plan. Kades-Margolis offers a retirement program for PSEA members – Money by Design. This program offers members a customized Roth 403(b) plan. Money by Design offers you more than 400 mutual funds, representing more than 20 fund families. The program allows you move between funds, fund families and a fixed-interest annuity option at no extra charge.

Working with a financial advisor may help you choose investments that best meet your financial objectives, based on your personal investment objectives and risk tolerance. You should consider the investment objectives, risks, and charges and expenses of the funds offered carefully before investing.

Withdrawals from your Roth 403(b)

Withdrawals from a Roth 403(b) plan are tax free if you have held the account at least five years, and you have a qualified distribution event. Nonqualified withdrawals are subject to ordinary income tax rates and an IRS 10% tax penalty.

Like traditional 403(b) plans, Roth 403(b) plans have Required Minimum Distributions (RMDs) starting at age 70½. However, you may choose to roll over the Roth 403(b) account balance into a Roth IRA at any time after you separate from service to avoid the RMD. Also, opening and contributing to a Roth 403(b) does not affect your eligibility to open and contribute to a traditional or Roth IRA.

Consult your financial advisor for information specific to your situation.

If you would like more information about a Roth 403(b) plan, please call Kades-Margolis at (800) 433-1828, ext. 4, or click this link, fill out the form and submit. We will have one of our financial advisors contact you.

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