Roth 403(b) Plan

What Is a Roth 403(b) Plan?

If you are looking for a tax-advantaged retirement savings plan, a Roth 403(b) may be a good option.

A Roth 403(b) plan is a tax-advantaged retirement plan that allows you to pay taxes on your contributions up front so that your withdrawals during retirement are taxed at a lower rate.

The Roth 403(b) is similar to a traditional Roth IRA but has higher contribution limits, does not require income restrictions for eligibility, and is offered through employers.

403(b) Withdrawal Rules

You can begin withdrawing funds from your Roth 403(b) plan without penalty once you reach age 59½. However, if you withdraw funds before age 59½, you may be subjected to early withdrawal penalties.

If you withdraw funds before reaching the required minimum distribution age of 70½ without penalty, some exceptions apply:

You are disabled or have a terminal illness and can no longer work. You need the money for medical expenses that exceed a certain percentage of your income.

You are using the money to pay for medical insurance premiums because you have been unemployed and received unemployment benefits for at least 12 weeks. You use the funds to pay for higher education expenses, such as tuition and books.

You can also take withdrawals from your Roth 403(b) plan before age 59½ without penalty due to a qualified disaster area event.

How Are Roth 403(b) Contributions Taxed?

You pay taxes on your contributions to a Roth 403(b) when you make them, but any investment earnings are tax-free, and you can withdraw the funds in retirement without paying taxes again.

Your contribution amount is determined by how much money has been deducted from your paychecks and deposited into a Roth 403(b) account.

The amount of your contribution is determined by how much money has been deducted from your paychecks and deposited into a Roth 403(b).

You may also have to pay an early withdrawal penalty if you withdraw funds before reaching age 59½ unless the exception applies.

403(b) Contribution Limits

There is no limit to how much you can contribute to a Roth 403(b), but there are limits on how much you can contribute to a traditional 403(b).

For 2023, the contribution limit is $22,500. If you are 50 or older, you are allowed to make an additional "catch-up" contribution of $7,500. This brings the total contribution limit for those aged 50 and up to $30,000.

The Roth 403(b) vs. the Roth IRA

The Roth 403(b), like the traditional 401(k) and the SEP-IRA, is only available to employees of organizations that are tax-exempt under section 501(c) of the Internal Revenue Code (IRC).

These include churches, public schools and universities, hospitals, medical groups, and other charitable organizations.

The Roth IRA, on the other hand, is available to anyone who meets the income requirements. You can contribute up to $6,500 in 2023 if you are under 50 or $7,500 if you are 50 or older.

The Roth 403(b) is a great option if you are not eligible to contribute to a Roth IRA. It offers many of the same benefits, including tax-free investment earnings and no required minimum distributions in retirement.

The Bottom Line

When it comes to choosing a retirement plan, there are many options to consider. But, if you are looking for a tax-advantaged plan with tax-free investment earnings, the Roth 403(b) should be at the top of your list.

The Roth 403(b) offers many benefits that make it an attractive option for retirement savings, including the fact that it can help you save up to $22,500 per year on a tax-deferred basis.

FAQs

1. When can I make Roth 403(b) voluntary contributions?

You can make Roth 403(b) contributions for the current year any time up to the due date of your tax return, including extensions. For prior years, you must establish a Roth 403(b) account by October 15th of the following year. If you are 50 or older, you can make additional "catch-up" contributions for the current year up to the due date of your tax return, including extensions.

2. Do I have the same investment options for the Roth 403(b) voluntary contributions as I do with the traditional pre-tax contributions?

No, you do not have the same investment options. Roth 403(b) contributions must be invested in designated Roth account funds, which are usually a subset of the investment options offered by your plan. Be sure to research the investment options available before making any Roth 403(b) contributions.

3. How do Roth 403(b) contributions differ from traditional 403(b) contributions?

The main difference between Roth and traditional 403(b) contributions is the tax treatment of the contributions and earnings. Roth contributions are made with after-tax dollars, but the earnings grow tax-free. With a traditional 403(b), the contributions are pre-tax, but the earnings are taxed when withdrawn in retirement.

4. How may Roth 403(b) contributions affect your paycheck?

If your plan allows you to make Roth 403(b) contributions, it is crucial to understand how they will affect your paycheck. The first thing to consider is that Roth 403(b) contributions are after-tax. This means that the contribution will reduce your taxable income by the amount of the contribution and increase your take-home pay by the amount of the contribution. For example, if your taxable income is $60,000 and you make a Roth 403(b) contribution of $2,000, your new taxable income will be $58,000.

5. Is the Roth 403(b) participation limited by household income?

No, there is no income limit for Roth 403(b) contributions. However, if you participate in a Roth IRA, your ability to contribute to a Roth 403(b) may be limited by the amount of your Roth IRA contribution.