RSS Feed

Financial Fitness Blog

Reasons to Roth

(Retirement) Permanent link   All Posts

Michelle Blog PhotoIf your district offers the Roth savings option in their 403(b)—or if you are debating between a Roth and Traditional IRA—you may want to consider directing all or some of your contribution to this after-tax option. Here are a few reasons why.

Reduce tax liability when you retire. Roth contributions are after-tax, which means you pay taxes now, but all qualified withdrawals, including earnings, are tax-free. For decades the assumption has been that most people would be in a lower tax bracket in retirement and thus would benefit from before-tax savings. However, this is less likely given changes in tax policy, including lower tax rates, the taxation of Social Security, and other deductions. Before-tax savings alone may not be the optimal tax strategy in every situation.

Potential benefits at all ages.

  • If you're a young public school employee, contributions compound tax free for decades. Paying taxes on contributions at current rates may be better than paying higher taxes later on contributions and earnings if you are taxed at a lower rate today.
  • Parents or grandparents looking for ways to pay for a child’s college education can access the money tax-free for this purpose if the Roth account is at least five years old and you are at least age 59½. Plus, retirement accounts generally aren’t part of federal financial aid calculations.
  • All Wisconsin public school employees have the benefit of receiving retirement income from the Wisconsin Retirement System, Social Security, as well as a 403(b) if contributions have been made. All are taxed when the money is withdrawn. Because retirement income from these sources may be substantial, you could get bumped into a higher tax bracket. If this is the case, you may benefit from paying taxes today on Roth contributions.

Roth savings could be worth more than a pre-tax. In some circumstances you may actually end up with more money at retirement by going with a Roth. In the example from our article, "Investing in a Roth 403(b) may give you a financial advantage," the Roth 403(b) can be worth significantly more than the pre-tax 403(b) at retirement with all things being equal and when taken out as a lump sum, even when you compare it to a pre-tax account where the tax savings has been invested over time. Learn more by reading our article.

Michelle Slawny, CFP®
Worksite Benefit Consultant