Although many teachers have heard of the 403(b), it has been my experience that most teachers have not yet heard about the Roth 403(b).
So, what are the differences?
The short answer: for the most part, the main difference is how and when you’re taxed on your money. For a little more information, keep reading.
If after reading the information below you would like to learn more, feel free to contact me. We can discuss which option is best for you and your specific situation, and how to maximize your savings and minimize your taxes.
Traditional 403(b)
Contributions – Generally, the maximum contribution limit for 2014 is $17,500. If you are age 50 and older you may contribute an additional $5,500/yr. Further, if you have completed 15 or more years of service with your current school district/employer, you may be able to contribute up to $3,000 more per year.
Pre-Tax – The money you contribute comes directly out of your paycheck and is a tax deduction in the year you make your contributions.
Tax Deferral – Your money will grow tax-free until you withdrawal from your account.
Taxes – As long as you follow IRS regulations, you will only be taxed on the money when you withdraw. Currently, withdrawals are treated as ordinary income.
Early Withdrawal Penalties – Except under certain conditions, you will be penalized by the IRS and by your state if you take any money out of your account before the age of 59 ½. You will also be taxed on all the money you withdraw.
Loans – Most companies allow loans from within the 403(b). Each company is different in how they handle loans. You should check with your company/advisor before taking out a loan.
Roth 403(b)
Contributions – Similar to a Traditional 403(b). Generally, the maximum contribution limit for 2014 is $17,500. If you are age 50 and older you may contribute an additional $5,500/yr. In addition, if you have completed 15 or more years of service with your current school district/employer, you may be able to contribute up to $3,000 more per year.
Post-Tax – The money you contribute comes directly out of your paycheck after taxes have been assessed.
Tax Free – As long as you follow IRS regulations, all your money could be tax–free to you and your heirs after age 59 ½.
Early Withdrawal Penalties – Except under certain conditions, you will be penalized by the IRS and by your state if you take any money out of your account before the age of 59 ½. In most cases, you will only be taxed on the gain earned from the money you withdraw.
Loans – Currently the law is not specific when it comes to loans with the Roth 403(b). Therefore, most companies do not yet allow loans to be taken.
For more information on 403(b)’s, I encourage you to either give me a call, or visit the IRS website below.
http://www.irs.gov/pub/irs-pdf/p571.pdf
–Updated July 3, 2014.