Is a Roth 403(b) Right for You?
Starting this year, your school or nonprofit may be offering a new retirement plan. It's the Roth 403(b), and for some people it'll be just the thing. Roth 403(b) plans will work something like the Roth IRAs introduced in1998. Unlike traditional IRAs and familiar 403(b) plans, Roths don't give you any tax break for putting money in, but the cash you take out in retirement will generally be tax-free. Also new this year is the Roth 401(k), a counterpart for workers in the private sector. Whether to offer the new plans and how soon to implement them is up to your employer.
So who'd be smart to consider a Roth 403(b) if one becomes available, and who would do better to stick with the traditional 403(b)? We put that question to a couple of savvy financial planners who frequently advise teachers. Here's the counsel they gave us.
Who should consider a Roth 403(b)? "It's a slam dunk for those who know they'll be in a higher tax bracket in the future," says Joan Parker, a certified financial planner in San Luis Obispo, CA. "And I'd say they'd be a good bet for those who will still be in the same bracket."
Younger workers whose salaries are likely to rise through the years, pushing them into ever-higher marginal tax brackets, are the most obvious candidates. They'd be giving up a modest tax break now for what could be a much more substantial one down the line.
But even workers who are far down their career paths may find the Roth route appealing. If, for example, you have a good pension plus a part-time job, your income may be nearly what it was before you "retired." Add in the taxable distributions that many retirement accounts require you to start taking at age 70 1/2, and you could find yourself in an equal or higher tax bracket.
Even if you're not expecting your taxable income to grow much in the years ahead, it could happen, points out Curt F. Fey, a certified financial planner in Pittsford, NY, a Rochester suburb. Inflation is one reason. With a part-time retirement job, for example, your salary is likely to rise over the years, if only through cost-of-living increases. A simple 3 percent annual increase would, at the end of 10 years, mean a 34 percent higher paycheck. Fey also points to the general state of the U.S. economy, with growing budget deficits and a national debt that last fall passed the $8 trillion mark. "Somebody has to pay for that sometime," Fey says. "So I'd expect taxes to go up."
Who shouldn't sign up for the new plans? By the same logic, Roth 403(b)s will make the least sense for people who are in relatively high tax brackets now and are reasonably certain that their incomes will decline once they retire. They'd be passing up the attractive tax break they'd get today by investing in a conventional 403(b), in return for what could be meager tax benefits in the future.
If this is your situation, you may even want to consider taking whatever money you save on this year's taxes as a result of your conventional 403(b) contributions and socking that saved money away separately for your retirement years.
Whichever group you fall into, Parker says, Roth plans are at least worth a close look if your plan offers one. "By law, they're scheduled to go away in 2010," she says. "This is a limited-time offer."
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About the Author
Writer Greg Daugherty specializes in money management issues.
This article originally appeared in NRTA Live & Learn, Winter, 2006.
