Understanding Roth 403(b) plans

Roth 403(b) plans are offered to employees in education, non-profit organizations, and certain religious organizations.  These plans are a hybrid of traditional 403(b) plans and Roth IRAs, and they were introduced 2001 to help offset some of the economic effects of a recession.

Key aspects of Roth 403(b) plans:

  • Roth contributions are post-tax contributions meaning that they are taxed when you earn the income, not when the retirement distribution is made. So, say you earn $2,000 per paycheck, and you contribute $200 as a Roth contribution. You will still pay taxes on the $2,000. Whereas if you had made a traditional 401(k) contribution of $200, you’d pay taxes on an adjusted paycheck of $1,800.
  • Employers must allow all employees to participate except for employees who work less than 20 hours per week, professors on sabbaticals, certain students, union employees, and non-resident aliens.
  • With all investment accounts, you expose some or all your invested money to loss for the chance to earn a higher profit. Investment gains hinge on an ongoing and long-term investment strategy that uses your risk tolerance and diversification to mitigate some risks. Even with these in place, you are exposing your money to loss.
  • For 2021, yearly contribution limits are $19,500 for people younger than 50 and an extra $6,500 catch-up amount for 50 and older. In addition, an employee of a “qualified organization” with 15 years of service may be eligible to contribute an additional $3,000. Contributions are made from January to December of that year.
  • Matching is not common for these types of plans. Employers often limit their role and do not provide employer contributions to the plan to remain exempt from Employee Retirement Income Security Act (ERISA) of 1974 rules. ERISA was put in place to safeguard employees who participate in employer run retirement plans.
  • With less oversite and no annual nondiscrimination tests (NDTs) for these plans, there are usually lower fees since those costs don’t need to be offset.
  • The vesting schedule is often much short than 401(k) plans.
  • Investment options are only Mutual funds and annuities. If your employer offers both a traditional 403(b) and a Roth 403(b) options, they may look identical in terms of cost and what you can invest in.
  • If you leave an employer, you can take your money with you. A Roth 403(b) can be rolled over to a new or existing Roth IRA, Roth 401(k), or Roth 403(b). Remember, Roth money has to stay in Roth accounts.
  • Profit-sharing, where a company offers stock options to its employees, is not available with these types of plans since these organizations are non-profit.
  • Required Minimum Distributions (RDMs) need to start at 72, but you can still contribute to this type of plan if you are still employed. With some plans, that contribution offsets the RMDs.
  • The earliest you can make penalty-free withdrawals is 59 ½, and the penalty is an extra 10% on top of the taxes collected. However, there are some exemptions to the early withdrawal penalty- if you are permanently and totally disabled, if you lose your job at 55 or older, if you have medical expenses that exceed 10% of your modified adjusted gross income, with some divorce settlement types and if you die.
  • You can take a low-interest loan on Roth 403(b) accounts, up to $50,000 or 50% of your account balance. If your balance is $10,000 or less, you can take out the full amount. You will have to pay back the loan within five years (this period may be extended if the money is used to buy a primary home) or at leaving that job, or it becomes taxable income. The payments will most likely be held back from your paycheck.

If you would like to explore investment accounts that would work for your personal or retirement goals, Scarlet Oak Financial Services can be reached at 800.871.1219 or contact us here.



Advisory services offered through Capital Asset Advisory Services, LLC, a Registered Investment Advisor. This material has been prepared for informational purposes.