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To Roth or not to Roth

icon rothParticipants may make contributions on a before-tax basis, an after-tax (Roth) basis, or some combination of the two up to the 403(b) limit. For current IRS contribution limits, please visit 403(b) FAQs. While the Roth 403(b) is a savings option, not all schools allow Roth contributions. Please check with your employer or call us to check availability.

What is the Roth 403(b) and how is it different from the standard 403(b)?

Roth contributions are after-tax, which means you pay taxes now on your contributions, but all qualified* withdrawals, including earnings, are tax-free.

This is different from 403(b) contributions that are made on a before-tax basis. Before-tax contributions reduce your taxable income and defer taxes until you withdraw the money.

So the question is, do you want to pay the taxes on your contributions now or after you begin taking distributions?

*For qualified withdrawals from the Roth 403(b), the participant must be age 59½ or older and have had the Roth 403(b) account for at least five years.

What is the benefit of after-tax savings?

One of the greatest benefits of Roth savings is the ability to reduce your tax liability in retirement.

For decades the assumption has been that most people would be in a lower tax bracket in retirement—and thus would benefit from before-tax savings. However, changes in tax policy, including lower tax rates, the taxation of Social Security, and other deductions available under the tax code increase the chances that you could be in the same or higher tax bracket when you retire.

These changes mean that before-tax savings may not always be the optimal tax strategy.

What does this mean to me?

At retirement, Wisconsin public school employees typically have at least three sources of income: Wisconsin Retirement System (WRS), Social Security, and individual retirement savings. All are taxable as ordinary income in retirement. Any tax savings realized today could be more than offset by a higher tax bill in retirement. The Roth 403(b) provides an opportunity to control your tax liability in retirement.

Is the Roth 403(b) right for everyone?

Before-tax contributions and tax-deferred growth are key advantages of 403(b) retirement savings accounts. However, there will be some who will benefit more from after-tax (Roth) contributions and tax-free growth.

Wisconsin public school employees have the benefit of receiving retirement income from WRS, Social Security, as well as a 403(b) if contributions have been made. All are taxed when the money is withdrawn. Because retirement income from these sources may be substantial, you could get bumped into a higher tax bracket. If this is the case, you may benefit from paying taxes today on Roth contributions.

A Roth 403(b) gives you tax-free access to some of your nest egg in retirement, allowing you to manage your tax situation and possibly preventing you from moving into a higher tax bracket. You may want to consult with a tax professional to assess the right type of contribution for you.

Follow this link for important 403(b) disclosures.

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