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Understanding Roth 403(b) Plans [2024]

By December 12, 2023No Comments

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 in 2001 to help offset some of the economic effects of a recession.[1]

Key aspects of Roth 403(b) plans:

  • Roth contributions are post-tax contributions taxed when you earn the income, not when the retirement distribution is made. So, say you earn $2000 per paycheck and contribute $200 as a Roth contribution. You will still pay taxes on the $2000. Whereas if you had made a traditional 401(k) contribution of $200, you’d pay taxes on an adjusted paycheck of $1800.[2]
  • Employers must allow all employees to participate except those who work less than 20 hours per week, professors on sabbaticals, certain students, union employees, and non-resident aliens.[3]
  • 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.[4]
Updated for 2024: Yearly contribution limits are $23,000 for people younger than 50 and an extra $7,500 catch-up amount for those 50 and older for 2024. In addition, an employee of a “qualified organization” with 15 years of service may be eligible to contribute an additional $3,000(lifetime employer-by-employer limit of $15,000). Contributions are made from January to December of that year.[5],[6],[7]
  • 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 the Employee Retirement Income Security Act (ERISA) of 1974 rules. ERISA was implemented to safeguard employees who participate in employer-run retirement plans.[8],[9]
  • These plans usually have lower fees with less oversight and no annual nondiscrimination tests (NDTs) since those costs don’t need to be offset.7
  • The vesting schedule is often much shorter than 401(k) plans.3
  • 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.3
  • 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.[10]
  • 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.7
Secure Act 2.0 Change: Required Minimum Distributions (RDMs) must start at 70 1/2 if you were born before 7/1/49; 72 if you were born on or after 7/1/49 or in 1950; 73 between 1951 and 1958; 75 in 1960 or later. If you were born in 1959, federal guidance is needed to determine if your Required Beginning Date is age 73 or 75, but you can still contribute to this type of plan if you are still employed. With some plans, that contribution offsets the RMDs.9,[11],[12]
  • The earliest you can make penalty-free withdrawals is 59 ½; 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.9
  • You can take a low-interest loan on Roth 403(b) accounts, up to $50,000 or 50% of your account balance. You can take out the full amount if your balance is $10,000 or less. You must repay the loan within five years (this period may be extended if the money is used to buy a primary home) or upon leaving that job, or it becomes taxable income. The payments will most likely be held back from your paycheck.[13]

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 you can contact us here.  To sign up for our weekly newsletter with the latest economic news, click here. 

Sources:

[1] https://smartasset.com/retirement/roth-403-b

[2] https://www.investopedia.com/terms/r/rothira.asp

[3] https://www.rbcwm-usa.com/resources/file-687824.pdf

[4] https://www.investor.gov/sites/investorgov/files/2019-02/Saving-and-Investing.pdf

[5] https://www.irs.gov/pub/irs-drop/n-22-55.pdf

[6] https://www.irs.gov/retirement-plans/403b-plan-fix-it-guide-an-employee-making-a-15-years-of-service-catch-up-contribution-doesnt-have-the-required-15-years-of-full-time-service-with-the-same-employer

[7] https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000#:~:text=Highlights%20of%20changes%20for%202024,to%20%247%2C000%2C%20up%20from%20%246%2C500.

[8] https://www.fool.com/retirement/plans/401k/401k-vs-403b/

[9] https://www.investopedia.com/terms/e/erisa.asp

[10] https://www.fool.com/retirement/plans/403b/withdrawal/

[11] https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds

[12] https://www.tiaa.org/public/support/faqs/required-minimum-distributions

[13] https://www.investopedia.com/articles/retirement/08/borrow-from-401k-loan.asp

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds

https://www.finra.org/investors/learn-to-invest/types-investments/retirement/401k-investing/investing-your-401k

 

This material has been prepared for informational purposes. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on individual circumstances.