In 2006, the Roth 403(b) was created. This new way to fund a 403(b) savings plan combines the features of a 403b plan with the tax-free growth advantage of a Roth IRA. With this new type of savings plan, participants will never pay federal income taxes on the growth portion of the account or on their contributions when they withdraw the money during retirement. A traditional 403(b) plan allows employees to contribute from their pre-tax income while a Roth 403(b) allows employees to contribute from post-taxed income.
Many employees who are currently participating in a 403(b) plan may be offered the opportunity to participate in a Roth 403(b). If they choose to do so, they could enjoy benefits like:
Avoid Paying Taxes Later – A traditional 403(b) lets you contribute pre-taxed income and pay income tax later when you withdraw. However, a Roth 403(b) lets you contribute with post-taxed income which means you will not have to pay taxes on it later when you withdraw. If you believe you will be in a higher tax bracket when you retire, a Roth option might be the best for you.
Tax-Free Growth and Earnings – Because you have already paid taxes on your contributions, you will not have to pay taxes when you withdraw. This also allows the contributions to grow tax-free and prevents earnings on contributions from being taxed when withdrawn, like they would be with a traditional 403(b).
You Can Have Both – Luckily, you are not limited to a traditional 403(b) or a Roth 403(b). You can have both types of plans, allowing you to maximize retirement savings.
Employees can contribute up to $18,000 in wages annually in 2015. Like other retirement plans, there is an additional catch-up contribution of $6,000 for employees age 50 and older in 2015. The maximum total contribution limit, which also includes any employer contributions, is the lesser of $53,000 or 100 percent of the employee's compensation in 2015.
A Roth 403(b) has minimum distribution rules that are similar to 403(b) withdrawal plans. To take full advantage of your Roth 403b, you must be at least 59½ years old when you begin withdrawing and have an account that is at least 5 years old. Accountholders will also need to begin taking mandatory distributions when they reach the age of 70½ if they have not already.