What is the Roth Contribution Option?
In your retirement plan, your pretax contributions have the potential to accumulate tax deferred and withdrawals are taxable. With the Roth option, your after-tax contributions have the potential to accumulate tax free. Withdrawals after age 59½ are tax free if distribution is no earlier than five years after contributions were first made. These potentially significant tax benefits are similar to a Roth IRA. There are other advantages to Roth contributions, including higher contribution limits than a Roth IRA.
Consider a Roth contribution if you:
- Are not eligible to make Roth IRA contributions because of high income.
- Would like to make Roth contributions greater than the Roth IRA limit.
- Feel confident your retirement Income needs are met and want to leave a potential tax-free legacy.
- Would like to help protect your retirement assets from potential tax consequences.
- Are just starting out and in a lower tax bracket
Roth contribution benefits:
- The Roth option does not have adjusted gross Income (AGI) limits.
- Contribution limits are higher than those of the Roth IRA, allowing you to maximize your after-tax retirement savings.
- Assets may be passed along to your beneficiaries, Income tax free.
- Having both pretax and after-tax assets in retirement accounts may provide a hedge against the uncertainty of future tax rates.
- The earlier you start, the more time you give your money to work for you. Also, withdrawals from Roth are typically tax free.*
*Withdrawals of earnings prior to age 59 1/2 are subject to ordinary income tax and a 10% penalty may apply. Earnings can be distributed tax free if distribution is no earlier than five years after contributions were first made and you meet at least one of the following conditions: age 59 1/2 or older or permanently disabled. Beneficiaries may receive a distribution in the event of your death. For governmental 457(b) plans, withdrawals are only allowed following separation from services or when you reach age 70 1/2.
Is the Roth contribution option right for you?
If you expect your tax rate during retirement will be:
- Higher than your current rate
- Lower than your current rate
- Same as your current rate
Your Preferred option may be:
- After-tax Roth 403b contributions. Since you already paid taxes on your contributions, withdrawals are tax free.
- Pretax contribution. While this money is taxable, you expect to benefit by being in a lower tax bracket during retirement.
- Either or both.
Note: Roth contributions are included in you maximum contribution limits, plus any catch-up limits, if applicable.