Roth 403(b) Vs Traditional 403(b) – Which One To Choose?

In every “Roth” plan, the deposit (a contribution) is made using after-tax income. In a traditional (tax-deferred) plan, it is the opposite. This is the major difference between a tax-deferred and Roth 403(b). The key to understanding the word “Roth” is using taxes. The major difference is the tax factor, which ultimately affects long-term growth and changes the tax slab.

Roth 403b accepts after-tax contributions. This allows you to enjoy tax-free withdrawals at the time of retirement. The opposite is true for traditional 403b. You won’t pay taxes on contributions, and it will grow tax-free over several years. When you withdraw from it, taxes apply.

Roth 403(b) And Traditional 403(b)

Since the annual, after-tax income is less, it will impact the contribution amount of the Roth account holder. On the other hand, a traditional account holder can contribute more without tax deduction. Therefore, a traditional account is also called tax deferred 403(b).

If you look closely, tax-deferred 403(b) allows account holders to fall into lower tax brackets and save on taxes. Saving and reinvesting continuously for years leads to a compound effect.

If a person has an annual income of $50,000 and contributes $5,000 each year, the growth of their account over several years will be far more in tax-deferred 403(b) than in the Roth 403(b) account.

Both tax-deferred 403(b) and Roth 403(b) are non-profit retirement plans offered to educational, healthcare, and religious institutes. It is the choice of employees to choose which type of account they want to open.

key differences in 403b and roth 403b — Key differences in Traditional 403(b) and Roth 403(b)

Contribution Limit Similarities

The contribution limit for Roth 403b is the same as traditional 403b. It was $22,500 for the year 2023. However, in 2024, it was increased to $23,000. If you are 50 or older, you’re eligible for catchup contributions of up to $7,500.

403b plan has extra flexibility on catch-up contributions provided by the IRS. If you are working in a 403b organization for up to 15 years, you are eligible to make a catch-up contribution of $3,000 annually for up to five years.

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Roth 403b also allows employers to match contributions to their employees’ accounts. The IRS has imposed the contribution limit under section 415(c)(1)(A) for both employee and employer contributions. In 2023, the employee and employer contribution limit was $66,000 for employees younger than 50 and $73,500 for employees age 50 or older. In 2024, this limit is increased to $69,000 for employees younger than 50 and $76,500 for employees 50 and older. You can use the Roth 403b calculator to get the aggregate amount you can save.

In a Roth 403b, contributions are made with after-tax dollars, which means you pay taxes on the money before it goes into the account. Employer matches, if offered, are typically made to a traditional 403b plan. This means that while your contributions grow tax-free, the employer match will be taxed when you withdraw it in retirement.

Withdrawal Rules For Tax Deferred 403(b) & Roth 403(b)

The withdrawals from Roth 403b are tax-free, as the contributions are made on after-tax dollars. However, the account holder pays taxes from a tax-deferred 403(b) account withdrawal. These taxes apply to all the funds, including contributions and growth.

Early withdrawal is a separate topic, a loan or borrowing from your savings. Apart from a few valid reasons, loaning money from your 403(b) can incur penalties and increased taxes. The following image will help you understand the major differences between withdrawing funds early from tax-deferred 403(b) and Roth 403(b).

Annual Income Savings Traditional 403(b) Vs Roth 403(b) Cheat Sheet

The following document is created by our financial analysts. Whether you chose roth 403(b) or traditional 403(b), both will grow your retirement funds.

Traditional 403(b) Vs Roth 403(b) Cheat Sheet.

Can You Roll A 403b Into A Roth IRA?

You can roll over your 403b into a Roth IRA. However, there are certain conditions, such as one being contributed pre-tax and the other being contributed post-tax. Since you’re rolling over your funds that have never been taxed to the account, which accepts contributions after the tax only, therefore, you’ll need to pay the income taxes on this rollover. On the other hand, rollover 403(b) to IRA is comparatively easy.

This kind of rollover is called Roth conversion, which means that you need to pay the taxes on your 403b funds before rolling over to the Roth IRA in a year you make a rollover. You don’t need to pay taxes again once the tax is paid and the funds are in the Roth IRA.

Conclusion

Roth 403b and traditional 403b are the same, except that in the Roth 403b, contributions are made with after-tax dollars, while in 403b, the contributions are made with before-tax dollars.

You can rollover your 403b to Roth IRA but it can be strategic, you need to consider the tax implications as the rollover may result in a significant tax bill for the year you make a rollover. It is advised to consult a financial advisor to help navigate the complexities and ensure a smooth process.

Frequently Asked Questions (FAQ’s)

Can I make 403b and Roth IRA contributions in the same year?

Yes, you can contribute to both Roth IRA accounts and a 403b in the same year.

Which one is better for me, Roth 403b or Roth IRA?

Although you can have both accounts simultaneously, consider the factors mentioned in this article if you want to choose one. Roth 403b offers high contribution limits, while Roth IRA offers more retirement options. Choose what suits you more; having a retirement plan is better than having nothing.