With a traditional IRA, you pay taxes when you withdraw. With a Roth IRA, you pay taxes when you contribute. The same with a Roth 403(b). You pay taxes now on your retirement savings contributions instead of later, although unlike a Roth IRA, the Roth 403(b) has no maximum income limits.
If your employer offers you this retirement savings plan option, you will be required to keep those funds in a separate account from other retirement savings. If you change jobs, you can roll over your account but only to another Roth 403(b) or Roth IRA.
Is there a time limit on a Roth 403(b)?
You would have had to open your Roth 403(b) account in 2006 when the plan was first offered in order to be eligible for withdrawal in 2011 because this account must date back at least five years. If you plan to retire sooner than five years from now, it is too late to use the Roth 403(b) for savings. If you will be working more than five years, you can only withdraw after age 59 1/2, except if you have a permanent disability or die before then.
What are the terms for withdrawal?
Every retirement savings plan comes with withdrawal restrictions and penalties if you withdraw early. For instance, if your employer contributes dollars to a Roth 403(b) and you withdraw funds prior to meeting the terms, you won’t be penalized on the dollars you contributed, but the employer’s contributions are tacked on to your income, possibly putting you into a higher tax bracket. Even if you follow the rules for withdrawal, taxes will be due for any employer contributions to your Roth 403(b) fund that had no upfront taxes deducted. The good news is that you never have to pay federal income taxes on any dollars earned by your own money.
What is the dollar limit on Roth contributions?
According to the IRS, http://www.irs.gov/retirement/article/0,id=152956,00.html#5, the limit in 2011 is $16,500 per individual per year. If you’re 50 or older, you can add catch-up contributions. That means you are allowed to contribute a total of $28,000 in 2011 including to your 401(k) or 403(b) and your Roth IRA. According to Money-Zine, www.money-zine.com/Financial-Planning/Retirement/Roth-403b-Plans, the “maximum total contribution limit, which also includes employer contributions, is the lesser of $49,000 or 100% of the employee’s compensation in 2010 and 2011.”
Is this a good plan for you?
That depends on your tax bracket now and your tax bracket when you retire. If you believe your tax bracket will be lower when you begin withdrawals, it might be smarter to save with traditional IRAs or 403(b) plans. If you think your tax bracket will be about the same when you stop working or have some other reason to want to get taxes out of the way now, you may want to build your nest egg with a Roth 403(b).