Financial Awareness Bulletins

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Vol. XIV, No. 5
January 2006

The Roth 403(b) Retirement Program

Summary

The Economic Growth and Tax Relief Reconciliation Act of 2001 created new employer-sponsored retirement programs, including the Roth 403(b). It is designed to appeal to individuals who want to save retirement money via their paychecks. Roth 403(b) contributions are made with after-tax dollars, but investment earnings are tax-free upon withdrawal (with certain conditions). These tax advantages are currently scheduled to expire at the end of 2010. Included is a comparison chart of the traditional 403(b), the Roth 403(b) and the Roth IRA.

ROTH 403(b)
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) created new employer-sponsored Roth retirement programs: the Roth 403(b) and Roth 401(k). The Roth 403(b) and the Roth 401(k) are designed to appeal to individuals who want to save retirement money via their paychecks.

The contribution limits for the Roth 403(b) are $15,000 with a $5,000 catch-up for individuals 50 or older. However, it should be noted that these contributions are made with after-tax dollars from your salary (normally done via payroll deduction). Roth 403(b) contributions will not reduce your current federal income tax; but investment earnings withdrawn after age 59½ are not subject to income taxes. Just as with a Roth IRA, the account has to be open at least five years for this provision to be applicable.

Contributions to a Roth 403(b) cannot be made by an employer. Any contributions made by the employer, whether matching and based on the employee’s contribution or lump sum, must be made into a regular/traditional 403(b), even if the employee is directing all of the retirement savings to a Roth 403(b).

Even though the Roth 403(b) is available, there is no requirement that an employer offer it. In fact, employers may choose not to offer the program because there are additional accounting and servicing costs associated with maintaining an additional retirement program.

Comparison to Roth IRA

The employer-sponsored Roth 403(b) program has the same tax-free advantages as a Roth Individual Retirement Account (IRA), with two exceptions. The original Roth IRA is subject to adjusted gross income (AGI) limitations of $110,000 for single taxpayers and $160,000 for married filing jointly. However, Roth 403(b) accounts are not subject to these limitations, so more highly compensated employees can participate. Also, while the Roth 403(b) allows loans, the Roth IRA does not.

The chart below compares the traditional 403(b), Roth 403(b), and Roth IRA:

	Traditional 403(b)	Roth 403(b)	Roth IRA
Contributions	Pre-Tax $	After-Tax $	After-Tax $
2006 Annual Contribution Limits	$15,000 ($20,000 if over age 50)	$15,000 ($20,000 if over age 50)	$4,000 ($5,000 if over age 50)
AGI Restrictions	None	None	Yes, AGI limits of: $110,000 single $160,000 joint/couple
Investment Earnings	Tax-Deferred	Tax-Free	Tax-Free
Taxes	Pay taxes on contributions and earnings later. Reduces current income tax.	Pay taxes on contributions now. Qualified withdrawals are tax-free.	Pay taxes on contributions now. Qualified withdrawals are tax-free.
Loans	Available	Available	Available

Sunset Provision

The tax advantages associated with a Roth 403(b), Roth IRA, and Roth 401(k) will expire at the end of 2010 unless Congress provides an extension. Investors need to consider how much they will invest if such provisions are not extended.

Investment Advice

Before investing in any new retirement program, you should consult with a qualified investment professional (Certified Financial Advisor or Certified Financial Planner).

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