To Roth or Not to Roth in Your 403(b)
Designating your 403(b) contributions
This brochure explains the Roth 403(b) and provides information to help you decide how after-tax and before-tax savings fit into your retirement savings strategy.
What is a 403(b)?
A 403(b) is a retirement savings program that allows public school employees to save for retirement with payroll contributions.
Until 2006, all contributions were made on a before-tax basis, allowing participants to defer taxes until the money was withdrawn in retirement. The savings options now allow participants to designate their 403(b) contributions as before-tax or Roth.
Whether you are a new enrollee in the 403(b) or a current participant, you will want to consider designating some or all of your contribution to this after-tax savings opportunity.
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 when you retire?
*For qualified withdrawals from the Roth 403(b), the participant must be age 59½ or older and have had the account for at least five years.
What is the benefit of Roth 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 alone may not be the optimal tax strategy in every situation.
What does this mean to me?
In retirement, Wisconsin public school employees typically have at least three sources of income: the Wisconsin Retirement System, 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 receive tax-free retirement income.
How can I start making Roth 403(b) contributions?
WEA Member Benefits offers the Roth feature to its plan sponsors (employers). However, districts are not required to offer the Roth 403(b) feature in their plan, so check with your employer to see if they offer this feature. Current participants whose employer offers the Roth 403(b) need to complete a new Salary Reduction Agreement (SRA) and choose investment allocations for their Roth contributions. If you do not have a 403(b) account with Member Benefits, you will need to complete an enrollment application as well.
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 Roth contributions and tax-free growth.
|Your situation||Roth 403(b)|
|Young public school employees||Contributions compound tax-free for decades. Paying taxes on contributions at current rates may be better than paying higher taxes later on contributions and earnings if you are taxed at a lower rate today.
Note: If you are married with children and are taking advantage of special tax credits, you may be better served with before-tax contributions if Roth contributions would cause you to lose your tax credits.
|Middle-aged to older public school employees||Wisconsin public school employees have the benefit of receiving retirement income from the Wisconsin Retirement System, 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 access to some of your nest egg in retirement tax-free, allowing you to manage your tax situation and possibly prevent you from moving into a higher tax bracket.
What’s the role of the Roth IRA?
The Roth IRA is another after-tax savings option. If you are maximizing your 403(b) contributions, or you are concerned about the ability to access your contributions before retirement, you may want to contribute to the Roth IRA.
However, not everyone is eligible to contribute to a Roth IRA. Your income must not exceed the stated Internal Revenue Service limits. Income limits are not applicable to the Roth 403(b).
Also worth noting is the difference between contribution limits for the Roth IRA and Roth 403(b). Contribution limits are substantially lower in the Roth IRA.
The basics about 403(b) and Roth 403(b) savings
|Contributions||Taxed upon withdrawal||Taxed before contributed|
|Earnings||Taxed upon withdrawal||Tax-free (qualified contributions)|
|Required minimum distributions (RMD)||Age 72 (age 70½ if reached prior to January 1, 2020)||Age 70½ unless rolled to Roth IRA|
|Taxes||Protects against declining tax rates||Protects against increasing tax rates|
|Beneficiaries||Taxed to heirs||Tax-free inheritance|
|Penalty-free withdrawals||Age 55 and retired||Age 55 and retired|
|Tax-free withdrawals||N/A||Age 59½ and account is held for five years|
TSA 3374-280-0120 (W)