This educational video discusses the basics of 403(b) and Roth 403(b) plans. The video was produced by Mark Matos, a financial advisor in Naples FL.
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If you’re an employee of a non-profit organization, a school, or a government agency, you might be eligible for a 403(b) retirement plan. This plan is similar to a 401(k) plan for private sector employees but has different tax-advantaged features. One of the variations of a 403(b) plan is the Roth 403(b), which offers additional tax benefits. In this article, we’ll cover the basics of both types of plans.

What is a 403(b) Retirement Plan?

A 403(b) plan is a retirement plan for employees of non-profit organizations, public schools, and government agencies. It is named after the section 403(b) of the Internal Revenue Code that outlines the rules and regulations for this type of plan.

A 403(b) plan works like a 401(k) plan where employees can make contributions from their pre-tax income to a retirement savings account. The contributions are invested in mutual funds or annuities, which grow tax-free until you withdraw the funds in retirement.

One significant advantage of a 403(b) plan is that it allows employees to contribute more significant amounts than a traditional Individual retirement account (IRA) or Roth IRA. The maximum contribution limit is $19,500 for the year 2021, and employees aged 50 or older can make an additional catch-up contribution of $6,500.

Under a 403(b) plan, your employer may also make contributions to your account, called employer matching or non-elective contributions. These contributions are typically subject to a vesting period, which means that you will only own a portion of the contributions if you leave the company before a certain date.

What is a Roth 403(b) Plan?

A Roth 403(b) plan is a variation of a 403(b) plan that offers additional tax benefits. While a traditional 403(b) plan allows pre-tax contributions, a Roth 403(b) plan permits after-tax contributions. This means that the money you contribute to the plan has already been taxed, and withdrawals in retirement are tax-free.

The Roth 403(b) plan’s contribution limits are the same as the traditional 403(b) plan, and the employer may also make contributions.

One notable advantage of a Roth 403(b) plan is that you won’t have to pay taxes on the withdrawals in retirement. This is different from a traditional 403(b) plan, where the withdrawals are taxed as income.

Another advantage of a Roth 403(b) plan is that it doesn’t have required minimum distributions (RMDs) at age 72. Under a traditional 403(b) plan, you must start taking withdrawals at 72, even if you don’t need the money. With a Roth 403(b) plan, you can let the money continue to grow tax-free for as long as you like.

Conclusion

A 403(b) plan is a retirement plan for non-profit employees, public school teachers, and government workers. It allows pre-tax contributions and grows tax-free until you withdraw the funds. The Roth 403(b) plan, on the other hand, permits after-tax contributions and tax-free withdrawals in retirement. Both plans have the same contribution limits and may offer employer matching contributions. Consider consulting with a financial advisor to determine which plan is right for you.