If you’re employed at a nonprofit organization, you might get a chance to pitch in for a Roth 403(b) retirement plan. A Roth 403(b) is a special kind of retirement plan where you put your money in after it’s been taxed. The great thing about 403(b) plans is that when you take money out of them in retirement, you won’t have to pay any taxes on it.
Continue reading to know more about the basics of Roth 403(b)s:
What is a Roth 403(b) and how does it work?
A 403(b) is a retirement plan that’s available for specific tax-exempt employers. If you’re a teacher, healthcare worker, librarian, or minister, you might have access to one.
Now, a Roth 403(b) is similar to a Roth 401(k) or a Roth IRA. The money you put into a Roth 403(b) has already had taxes taken out of it. By doing this, you’re essentially saying no to a tax break right now, but in return, you get the benefit of being able to take money out of your Roth account in retirement without paying any taxes on it.
A lot of employers who offer 403(b) plans also have programs where they match their employees’ contributions, up to a certain amount. While you can put your money into a Roth 403(b), your employer can only contribute to a traditional 403(b). So, if you choose the Roth version, any contributions your employer makes will go into a separate traditional 403(b) account.
One downside of Roth 403(b)s is that your investment choices are often limited to annuity contracts provided by insurance companies and mutual funds.
Roth 403(b)s vs. traditional 403(b)s
If your workplace provides a 403(b) plan, you’ll likely get to choose between two options: a traditional 403(b) and a Roth 403(b). The main distinction between these two is how taxes are handled both now and in your retirement years.
With a Roth 403(b), you put in money that has already been taxed, which means you don’t get any immediate tax benefits. However, when you take the money out during retirement, you won’t have to pay any taxes on it.
On the other hand, with a traditional 403(b), you use pre-tax dollars for your contributions, which can reduce your current taxable income. But when you withdraw the money in retirement, you’ll owe income taxes on it.
Roth 403(b) contribution limits
You can put money into a Roth 403(b) every year, and there’s no income limit on it. For most employees, the contribution limits for 403(b)s are the same as those for 401(k)s. In 2023, here are the yearly limits:
- If you’re under 50, you can contribute up to $22,500 a year. (It was $20,500 in 2022).
- If you’re 50 or older, you can put in as much as $30,000 annually. (It was $27,000 in 2022). And if you’re in this age group, you can make catch-up contributions of up to $7,500 a year. (It was $6,500 in 2022).
- If you’re younger than 50, the total of what both you and your employer contribute can’t exceed $66,000 per year. (It was $61,000 in 2022). For those 50 and older, the combined limit is $73,500 a year. (It was $67,500 in 2022).
Remember, these limits apply to all the retirement accounts you have through your employer.
Now, there’s a special rule from the Internal Revenue Service (IRS) that gives you some extra leeway on catch-up contributions for 403(b) plans. If you’ve been with your employer for at least 15 years and have a 403(b) plan, you can add an extra $3,000 to your yearly contributions, even if you’re under 50. The most you can put in this way over your lifetime is $15,000.
Roth 403(b) withdrawal rules
The money you put into a Roth 403(b) can’t be taken out anytime you want without facing taxes and penalties. To make a withdrawal without these extra costs, you need to meet certain conditions. You should be at least 59 1/2 years old and have held the Roth 403(b) account for at least five years. There are some exceptions to this rule, like if you become permanently disabled.
If you take money out of a Roth 403(b) account before meeting these conditions, you’ll have to pay income tax and a 10% penalty on the earnings part of what you withdraw.
Additionally, once you reach the age of 72, you’ll be required to take out a minimum amount from your Roth 403(b) each year. However, if you’d rather not take these required minimum distributions, you can consider transferring your money into a Roth IRA.
Taxes with a Roth 403(b)
The money you keep in a Roth 403(b) account can grow without you having to pay taxes on it. And when you take it out during retirement, you won’t owe any taxes as long as you follow the IRS rules for qualified distributions.
However, if your employer matches the money you put into your Roth 403(b) and those matched contributions, along with any earnings, are kept in a traditional 403(b) account, you’ll need to pay income tax on those contributions and earnings when you withdraw them in retirement.
Should you invest in a Roth 403(b) plan?
A Roth 403(b), or any retirement account like it, can be a smart choice if you want to reduce your taxes during retirement or think that tax rates may go up in the future. Here’s a simple way to think about it: If you believe your tax rate when you retire will be higher than what you’re paying now, a Roth account is a good idea.
Putting money into a Roth 403(b) plan, alongside a traditional 401(k) or an individual retirement account (IRA), can be a wise move for your taxes. By using different types of plans, you can get some tax benefits today and enjoy some tax-free income when you retire.
What’s great is that you can contribute to a Roth 403(b) no matter how much you earn, which is handy if your income is too high to qualify for a Roth IRA. However, remember that it’s up to your employer to offer this kind of plan since it’s tied to your job.
