When it comes to retirement, you're on the ball. You probably know how much to save and how to do it.
Except you might not know what kind of plan you need. You know your job offers a traditional and Roth 403b plan, but maybe you don't know which one you actually want.
You've come to the right place. Test your situation using our Roth 403b calculator, and keep reading to find out about these plans and how to choose the right one.
Ready to calculate your earnings in retirement? We're here to help.
Our Traditional vs Roth 403b calculator can help you get a clearer picture of your future savings with either type of account. It will let you know which account will be worth more at retirement.
This tool analyzes at your investment returns and years to save, along with your current and future tax obligations to aid in your decision. To help you make an informed choice, we've also compiled answers to some of your most commonly asked questions.
First, let's start with the traditional plan.
A 403b plan is a form of tax-deferred retirement plan designed for certain public school employees, ministers, and tax-exempt organizations.
It's also a type of defined contribution plan, which means that employees know how much they put it but not necessarily how much they will receive. That will depend primarily on the type of investments they choose to make in the 403b plan.
This is actually more common than you think--it's the same basic type of plan as an IRA or 401(k).
Employees make salary contributions to the 403b plan that are deducted from their income or excluded altogether, which means the contributions aren't subject to income tax, though you still pay Social Security and Medicare taxes.
In other words, like a 401(k), the 403b plan allows you to make tax-deferred contributions, which means that you'll pay taxes on your contributions when you withdraw from the account later in life.
Individual accounts in such a plan also include annuity contracts which invest in mutual funds or in a retirement income account created for church workers.
There are several different types of contributions you can make to a 403b plan. These include elective deferrals, after-tax contributions, and nonelective contributions.
Elective deferrals are the ones you've probably heard of. This is when an employee voluntarily allows an employer to take contributions directly out of their paycheck to pay directly to the retirement account.
Nonelective contributions, on the other hand, are mandatory employer contributions to the account.
Finally, after-tax contributions are when you make voluntary contributions to the account that must be included as income when you file your taxes.
This brings us to the close cousin of the 403b, the Roth 403b plan. First, let's cover the Roth part of the equation.
To make a long story short, Roth is a provision that allows you to withdraw distributions to qualified plans without paying taxes on it. Ever.
That said, you won't get a tax deduction in the amount of your contribution.
There are also certain caveats: you must be at least 59 1/2 at the time of the withdrawal (or disabled or deceased), and it must occur after a five-taxable-year period.
In most cases, it's up to your employer to decide what type of retirement plan they offer, and they can choose whether or not to provide the Roth option.
Since this is a Roth and not a traditional 403b plan, you contribute at a different point in the life-cycle of your paycheck.
Unlike a traditional plan, in which you contribute pre-tax, a Roth plan has you contribute with after-tax income. This means that you're paying taxes on those contributions just like the rest of your salary.
All of this begs the question: what's the difference between a Roth 403b and the better-known Roth IRA?
A Roth IRA is funded with after-tax dollars and the contributions are not tax-deductible; however, when you start withdrawing funds, qualified distributions are tax-free.
The essential difference between a Roth IRA and a Roth 403b is who can have this type of account.
Anyone can have a Roth IRA as long as you have earned income, while 403b plans are limited to specific public school employees, church ministers, and tax-exempt organizations.
So, with all of this in mind, which one is the right plan for you?
Well, that depends on how you feel about your taxes, and whether you're an immediate reward or delayed reward type of person.
If you recall, the traditional 403b plans are designed to help reduce an employee's taxable income by contributing to the retirement account before tax.
Roth doesn't quite work that way.
When you make contributions to a Roth account, you pay taxes on those contributions now, but the money sitting in your Roth account can grow tax-free and you won't have to pay taxes on it when you withdraw from the account.
Note that this comes with caveats: it has to be withdrawn after a five-taxable-year period and you must be at least 59 1/2 when you make the withdrawal.
You want a Roth plan if you think you'll have a lower taxable income in retirement than you will right now, or you think your tax bracket isn't going to change that much.
This is usually true of people who are opening an account later in life or at the start of their careers.
By contrast, you want a traditional plan if you want to make the most of tax deductions right now and pay taxes on your retirement income later on.
The question is, ultimately, whether you think your tax bracket is going to change later in life, whether you'll go up, down, or stay the same.
Obviously, you'd prefer to pay fewer taxes if you can, so you'll make your choice with that in mind.