If your district offers a Roth feature with its 403(b) retirement plan, you may be trying to decide which to participate in, a traditional or a Roth. Whether to choose a traditional 403(b) plan or the Roth version will depend on your goals and financial circumstances.
Comparing the Accounts
The following are features of traditional 403(b) retirement plans:
- Your contributions are made before taxes, so you save on your current tax bill.
- Contributions and earnings grow tax-deferred, and withdrawals at retirement are taxed at ordinary income tax rates.*
Roth 403(b) accounts are different because:
- Your contributions are made on an after-tax basis; there is no current tax break.
- Contributions and earnings can be withdrawn tax-free at retirement if certain conditions are met.**
So Which Is Better?
There is no one answer for everyone. Whether a Roth makes sense for you will depend on your current and anticipated financial situations. 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 and benefit from tax-free withdrawals later.
A financial or tax advisor can help you look at the options to see which makes more sense for you.
* Withdrawals made prior to age 59 ½ (age 55 if leaving your job) may be subject to a 10% tax penalty.
** Withdrawals from a Roth 403(b) plan are tax-free if the account has been held at least five years and the account holder is at least age 59 ½. Nonqualified withdrawals are subject to ordinary income tax rates and a 10% tax penalty.
Traditional 403(b) Plan Vs. Roth 403(b) Plan
| ||403(b) ||Roth 403(b) |
|Pre-tax contributions ||Yes ||No |
|Income eligibility limit ||No ||No |
|Contribution limit (2015) ||$18,000 ||$18,000 |
|Catch-up contributions for age 50+ ||$6,000 ||$6,000 |
|Tax-free distributions ||No ||Yes* |
|Required minimum distributions ||Yes† ||Yes‡ |
* Distributions are tax-free if the account holder is at least age 59 1/2 and has held the account for at least five years. Nonqualified withdrawals are subject to income tax and a 10% penalty.
† Required minimum distributions (RMDs) must begin by April 1 of the year after the ear the participant turns age 70 1/2 (some plans do not have RMDs if the participant is still employed). If RMDs are not met, there may be a 50% tax penalty on the amount that should have been withdrawn, but wasn't.
‡ Distributions from a Roth 403(b) must be made under the same rules as a traditional 403(b). However, a Roth account may be rolled over into a Roth IRA, which is not subject to RMDs during the original account holder's lifetime.