Before you start contributing, it’s important to understand where your money is going and the tax implications this account can have on you into retirement.
When it comes to setting aside money for retirement, you’ve likely heard the names of a few account types thrown around - IRA, Roth IRA, 401(k), etc. But for some eligible individuals, your employer may offer you a Roth 403(b) plan.
Below we’ll outline what a Roth 403(b) plan is and if it may be right for you.
What Is a Roth 403(b) Plan?
Roth 403(b) plans were introduced to public sector employees by Congress in 1958 to help those who were ineligible for 401(k) plans to better save for retirement.2 This tax-deferred retirement account offering is only available to government workers and employees of public schools, nonprofits, charitable organizations and certain ministries or religious organizations. Any organization that falls under the IRS’s 501(3)(c) tax exemption code may offer a 403(b) plan to its employees.1
How Does a Roth 403(b) Differ From a Roth 401(k) Plan?
An easy way to differentiate these plans is to think of 401(k) plans as options for private sector employees (those who work in for-profit business and corporations) and a 403(b) plan as being offered to public sector employees, as we’ve outlined above. Other than that, the specifics of these plans are fairly similar, although their vesting schedules and investment options may differ.
Traditional 403(b) Vs. Roth 403(b)
Just like its 401(k) counterpart, eligible participants can choose whether to partake in a traditional 403(b) plan or Roth 403(b) plan. While the main difference between the two are the tax advantages, there are a few other important variations to consider as well.
When using a traditional 403(b), you are funding your retirement account with pre-tax contributions. This lowers your taxable income amount, meaning you pay fewer taxes the year the contributions are made. In return, you pay taxes on the money in the account as well as the accrued interest when the money is withdrawn (ideally once you enter retirement). With a traditional 403(b) plan, you are required to stop contributing and start withdrawing at age 70½.3
Alternatively, a Roth account is made using after-tax contributions. That means this type of account does not reduce your income level for the year, and the money added to this account is taxed alongside the rest of your earned income. However, once you are ready to begin withdrawing from your Roth 403(b) you will not have to pay taxes on the contributions or any earned income within the account. Additionally, as long as you are living, you are not required to begin withdrawing from this account at a certain age.
Is a Roth 403(b) Plan Right For You?
If you’re an employee of a qualified organization and are offered a 403(b) plan, it’s important to decide whether a traditional or Roth account will be best for you. Generally speaking, those who believe they will retire in a higher tax bracket than they’re earning in today find that a Roth account may be beneficial. Or, if retirement is still quite far away, the investment earned on a Roth account over several decades may make it worth passing over tax breaks now. Either way, take a look at your specific earnings and projected future path to best decide which type of 403(b) plan may be best for you now and into retirement.
Taking advantage of an employer-sponsored retirement plan can be an easy and effective way to save money for retirement. Remember to weigh all of your options and take advantage of incentives such as employer matching contributions, as these can be a great way to boost your retirement income in either type of account.
For more information on retirement accounts, feel free to contact our team, California Retirement Advisors, at cradvisors.com or call at 888-643-7472 to request a meeting with one of our licensed advisors.
By Christian Cordoba
CERTIFIED FINANCIAL PLANNER™
Founder, California Retirement Advisors
Investment advisory services offered through Mutual Advisors, LLC DBA California Retirement Advisors, a SEC registered investment adviser. Securities offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Securities, Inc. and Mutual Advisors, LLC are affiliated companies. CA Insurance license #0B09076. This content is developed from sources believed to be providing accurate information and provided by California Retirement Advisors. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. California Retirement Advisors, nor any of its members, are tax accountants or legal attorneys and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional.