How do Roth 403(b) contributions differ from traditional 403(b) contributions?
With a Roth 403(b) feature, you can designate all or a portion of your future deferral contributions as “Roth contributions.” Traditional 403(b) contributions are made on a pre-tax basis and are not included in current taxable income. The pre-tax contributions and any earnings will be subject to income taxes when withdrawn. In contrast, Roth 403(b) contributions are made on an after-tax basis and are included in current taxable income. Earnings are tax free if they are part of a “qualified distribution.”
Are there any limits as to how much I may contribute to my designated Roth account?
Yes, the combined amount contributed to all designated Roth accounts and traditional, pre-tax accounts in any one year for any individual is limited by the 402(g) limit - $19,000 for 2019 (plus an additional $6,000 in catch-up contributions if age 50 or older).
Can my age-50 catch-up contributions be made as a designated Roth contributions to my deisgnated Roth account?
How may Roth 403(b) contributions affect my paycheck?
You elect a dollar amount that you wish to contribute to the Roth source within your existing plan, just like a traditional 403(b) contribution. However, unlike your traditional 403(b) contribution, you pay taxes up front on the Roth contribution. Therefore, your take home pay will be less if you are making Roth contributions than it would be if you were making traditional Pre-tax contributions.
Assume eligible gross compensation is $60,000 per year or $5,000 per month with a 25% federal income tax withholding rate
Pre-Tax contributions Roth contributions Contribution $6,000 Compensation $60,000 $60,000 Less: Pre-tax contribution for the year ($6,000) $0 Taxable Income $54,000 $60,000 Less: income taxes (25%) ($13,500) ($15,500) Less: Roth contribution $0 ($6,000) Net after-tax (take home pay) $40,500 $39,000 Difference in take home pay for the year is: ($1,500)
This hypothetical example is for illustrative purposes only. It shows the potential impact on take-home pay assuming a pre-tax or after-tax annual contribution of $6,000 based solely on an assumed 25% federal income tax withholding rate. Actual taxes and take home pay will depend on your individual tax situation. No other payroll deductions are taken into account. Pre-tax contributions and any related earnings will be taxed at the time of withdrawal. Any earnings on after-tax Roth contributions are tax-free if certain conditions are met.
Can I make contributions to both the Traditional Pre-tax 403(b) and the Roth 403(b) source?
Yes. You may contribute to both the traditional Pre-tax and Roth option as long as you do not exceed the total IRS contribution limit for that year. In 2019, the combined IRS contribution limit for both Roth and traditional Pre-tax contributions if you are under age 50 is $19,000. If you are over age 50 and make catch-up contributions, the combined IRS contribution limit for both Roth and traditional Pre-tax contributions is $24,000. If you are a high wage earner, your limit for voluntary contributions may be less.
Are there eligibility restrictions on contributing to a Roth 403(b) option?
No, if you are eligible to make pre-tax contributions to your traditional 403(b) plan, you are eligible to make Roth 403(b) contributions. In addition, unlike a Roth IRA, the Roth contributions to your retirement plan are not subject to restrictions based on your adjusted gross income.
How do I know if a Roth 403(b) option makes sense for me?
Generally, if you expect to be in the same tax bracket in retirement as you are now, a traditional, pre-tax, or a Roth 403(b) contribution are roughly equivalent from a tax perspective. If you expect to be in higher tax bracket in retirement, a Roth 403(b) may be the better choice since you won’t pay taxes on qualified distributions of earnings. If you expect to be in a lower tax bracket in retirement, then a traditional, pre-tax contribution may make more sense for you. Whether to contribute to the Roth option depends on your own personal situation and many factors should be taken into account. Due to the differing tax implications associated with traditional, pre-tax versus Roth 403(b) contributions, and the potential impact they may have on your current adjusted gross income, which may affect your eligibility for other tax credits and benefits, you may wish to consult with a tax or financial advisor regarding your individual situation.
What is a qualified distribution?
A qualified distribution is one that is taken at least 5 tax years from the year of your first Roth 403(b) contribution and after you have attained age 59 ½, become disabled or die.
FAQs provided by Fidelity Investments and the IRS web pages.
Updated as of April 2019