What is a Roth 403(b)?

Roth 403(b) Basics

Elective deferral contributions to a traditional retirement plan are contributed on a pre-tax basis and help lower your current taxable income. Roth elective deferral contributions, however, are much like a Roth IRA in that contributions are made on an after-tax basis.  Money in the Roth account and any earnings will be distributed tax-free if withdrawn after age 59½, death, disability and at the end of the five-year taxable period during which the participant’s deferral is first deposited into the Roth 403(b) account (a.k.a. the Five Year Rule). A Roth 403(b) account can be rolled over to another plan that permits Roth 403(b) contributions or to a Roth IRA. If rolled into a Roth IRA, the tax-free nature remains and the money is not subject to the minimum distribution requirement at age 70½ as in the Roth 403(b). 

Who Would Likely Benefit?

• People who believe taxes will be greater in the future

• Young investors who believe they will be in a higher tax bracket in the future

• Investors who do not qualify for the Roth IRA due to income limit

• Low income investors who are tax-exempt

• Investors who use Roth 403(b) as a planning tool in conjunction with traditional 403(b) plans

• Allows participants to hedge against risk of higher future tax rates

Who Would Likely Not Benefit?

• People certain that future tax rates will decrease

• People expecting to experience a significant drop in income upon retirement

• People with high temporary income

• People needing access to their funds within the first five years of deferrals

In summary, Roth 403(b) contributions have potential to allow individuals more flexibility in saving for retirement, whereby giving investors more control over the taxable alternatives. KerberRose recommends a cautious approach when weighing the pros and cons.

Contact Tony Powers at 401kservices@kerberrose.com or (715) 524-6626 for more information on Roth 403(b) and to better determine an appropriate course of action.