Yes, you can have both a Roth 403(b) and a traditional 403(b) account. In fact, many people choose to contribute to both types of accounts to diversify their retirement savings and maximize their tax benefits.
Understanding Roth and Traditional 403(b) Accounts
Traditional 403(b) accounts offer tax-deferred growth. This means that your contributions are made with pre-tax dollars, reducing your taxable income in the current year. However, when you withdraw the money in retirement, it will be taxed as ordinary income.
Roth 403(b) accounts offer tax-free growth and withdrawals. This means that your contributions are made with after-tax dollars, so you don’t get an immediate tax break. However, when you withdraw the money in retirement, it will be completely tax-free, including any earnings.
Benefits of Having Both Roth and Traditional 403(b) Accounts
There are several benefits to having both types of accounts:
- Tax diversification: By having both Roth and traditional accounts, you can spread out your tax burden in retirement. This can help you avoid being pushed into a higher tax bracket when you start withdrawing money.
- Flexibility: Having both types of accounts gives you more flexibility in how you manage your retirement savings. For example, you could use your Roth account for short-term goals, such as a down payment on a house, while using your traditional account for long-term goals, such as retirement.
- Maximize contributions: If you’re nearing the annual contribution limit for 403(b) accounts, having both types of accounts allows you to contribute the maximum amount to each. This can help you save more money for retirement.
Considerations for Choosing Between Roth and Traditional 403(b) Accounts
When deciding whether to contribute to a Roth or traditional 403(b) account, consider the following factors:
- Your current tax bracket: If you’re in a low tax bracket now, you may benefit more from a Roth account, as you’ll pay taxes on your contributions now but not on your withdrawals in retirement.
- Your expected tax bracket in retirement: If you expect to be in a higher tax bracket in retirement, you may benefit more from a traditional account, as you’ll pay taxes on your withdrawals then, but not on your contributions now.
- Your investment goals: If you have short-term goals, such as buying a house, you may want to consider a Roth account, as you can withdraw your contributions tax-free.
- Your risk tolerance: Roth accounts are generally considered to be less risky than traditional accounts, as you’re not taxed on the earnings.
Ultimately, the decision of whether to have a Roth 403(b) and a traditional 403(b) account is a personal one. There is no right or wrong answer, and the best choice for you will depend on your individual circumstances. However, by understanding the benefits and drawbacks of each type of account, you can make an informed decision that will help you reach your retirement goals.
Frequently Asked Questions
Can I roll over money from a traditional 403(b) to a Roth 403(b)?
Yes, you can roll over money from a traditional 403(b) to a Roth 403(b). However, you will have to pay taxes on the amount that you roll over.
What happens if I leave my job before I reach retirement age?
If you leave your job before you reach retirement age, you can still keep your 403(b) accounts. You can either leave the money in the accounts and continue to grow it, or you can roll it over to another retirement account.
What happens if I die before I reach retirement age?
If you die before you reach retirement age, your 403(b) accounts will be passed on to your beneficiaries. Your beneficiaries will have to pay taxes on the money when they withdraw it.
Is there a limit to how much I can contribute to a 403(b) account?
Yes, there is a limit to how much you can contribute to a 403(b) account. For 2023, the limit is $22,500 for employees under age 50, and $30,000 for employees age 50 or older.
Can I contribute to both a 403(b) and a 401(k)?
Yes, you can contribute to both a 403(b) and a 401(k). However, the total amount that you can contribute to both accounts combined is limited. For 2023, the limit is $66,000 for employees under age 50, and $73,500 for employees age 50 or older.
How to Enroll for Roth 403(b) Contributions
Signing up for Roth contributions is easy. Click here for more information.
For instance, Sophia and Fred each give $3,600 a year to the 20403-0(b) Plan, and they both receive 6% annually from their investments. But Sophia makes pre-tax contributions while Fred makes Roth contributions. (This implies that before being credited to Fred’s account, his contributions are taxed as ordinary income.) ) After 30 years each has $284,609 for retirement. However, Sophia will owe taxes on her withdrawals. Freds withdrawals will be tax-free. *.
This hypothetical illustration does not represent any particular investment.
* Fred paid $16,200 in taxes on contributions over the course of three years, based on a 2015 tax bracket. All tax references apply to federal taxes only. Individual state tax laws may vary.
** The tax rate in effect at the time of distribution and the amount withdrawn will determine the total amount of taxes due.
Roth contributions will change your take-home pay
Every dollar contributed to a Roth 403(b) lowers the amount that can be contributed pre-tax to the Faculty and Staff Retirement Plan, and vice versa, because these contributions are subject to the same IRS limitations as pre-tax contributions.
Because income taxes are withheld and paid on after-tax Roth 403(b) contributions, your take-home pay will be lower than it would be if you made an equivalent pre-tax contribution.