To Roth or Not to Roth?
Last updated: 8/12/2009 2:11:37 PM
Like the 401(k) offered in the private sector, the 403(b) tax-sheltered annuity is a great way for Wisconsin public school employees to save for retirement. In 2007 the IRS made it even better by allowing you to designate all or a portion of your 403(b) contributions as after-tax (Roth).
The difference between a 403(b) and Roth 403(b)
403(b) contributions are made on a before-tax basis. Before-tax contributions reduce your taxable income and defer taxes until you withdraw the money.
Roth contributions are after-tax, meaning you pay taxes now on your contributions, but all qualified* withdrawals, including earnings, are tax free.
The benefit of Roth savings
One of the greatest benefits of Roth savings is the ability to reduce your tax liability in retirement. For decades the assumption has been that most people will be in a lower tax bracket in retirement and thus can benefit from before-tax savings. However, changes in tax policy, including lower tax rates, the taxation of Social Security, and other deductions available under the tax code, increase the chances that you could be in the same or a higher tax bracket when you retire. These changes mean that before-tax savings alone may not be the optimal tax strategy in every situation.
What does this mean for me?
In retirement, Wisconsin public school employees typically have at least three sources of income: Wisconsin Retirement System, Social Security, and before-tax individual retirement savings. All are taxable as ordinary income in retirement. Any tax savings realized today could be dwarfed by a higher tax bill in retirement. The Roth 403(b) provides an opportunity to receive tax-free retirement income.
Generally, Wisconsin public school employees should consider adding the Roth 403(b) to their savings strategy. The Roth option is particularly attractive to young employees who may be in a lower tax bracket and can count on years of tax-free earnings. Also, anyone who expects to be in a higher tax bracket in retirement should consider adding Roth contributions to their savings strategy. You can contribute to 403(b) and Roth 403(b) programs concurrently.
How you can start making Roth 403(b) contributions?
School districts are not required to offer the Roth 403(b) feature in their plan. Click here to see if the Roth 403(b) available through WEA Trust Member Benefits is available in your district. If it is, simply fill out a Salary Reduction Agreement to direct part or all of your contributions to the Roth 403(b).
Want more? View our "To Roth or Not to Roth in Your 403(b)" brochure.
*For qualified withdrawals from the Roth 403(b), the participant must be age 59 ½ or older and have had the account for at least five years.
All retirement articles»
All insurance articles»
©2010 WEA Trust Member Benefits
Contact · Accessibility