What is a Roth 403(b) and Roth IRA?
These are distinctly 2 different investments that sound alike so can easily be confused.
The Roth 403(b) contributions are deducted from your paycheck after taxes and the interest accrues tax deferred until 59 1/2 years of age and if you've had the account for 5 years then all withdrawals are tax free. If you take it out prior to that time without meeting a qualifying event, you will be subject to taxes and tax penalties on the interest earnings.
The contribution limits are $23,000 (2023), and for ages 50+ an additional $7,500 and if you have been employed with the same employer for 15 years and qualify you may contribute an additional $3000 annually for 5 years not to exceed $15,000.
Roth 403(b) requires you start required minimum distributions (RMD's) at age 73 (if you turned 70 1/2 prior to 12/31/2019 thereafter withdrawals required at age 72) whereas Roth IRA's don't require withdrawals. The solution is simple, roll your Roth 403(b) into a Roth IRA.
The Roth IRA contributions limits are $7,000 or $8,000 for ages 50+ and are not payroll deducted but set up via electronic bank deduction and/or checks.
An advantage a Roth IRA has over a Roth 403(b) is being able to withdraw your deposits without federal or state taxes/penalties (because you've already paid taxes on the deposits), just leave your interest earnings in the account to avoid taxes/penalties until you meet a qualifying event. A Roth 403(b) doesn't allow that, you will pay taxes and penalties on your interest earnings unless you meet a qualifying event as any withdrawals must proportionately take out interest earnings.
Another benefit of a Roth IRA is you can withdraw up to $10,000 of your interest earnings tax free for a first-time home purchase, i.e., if you deposited $30,000 plus have $10,000 in interest earnings, that equals a $40,000 for a down payment. A Roth 403(b) doesn't allow this however you may be able to take a loan. Roth 403(b) allows for loans whereas Roth IRA doesn't.
Why Should I save in an after-tax Roth 403(b) Account?
If you think your taxes will be higher at retirement and want tax-free withdrawals available to you at age 59 ½ or later and the account has been in existence for 5 years.
If you are not in a high tax bracket therefore tax deductible savings isn’t as important.
You want to access to the account via loans.
Why Should I save in an after-tax Roth IRA Account?
If you think your taxes will be higher at retirement and want tax-free withdrawals available to you at age 59 ½ or later and the account has been existence for 5 years.
If you are not in a high tax bracket therefore tax deductible savings isn’t as important.
If you want to withdraw your principal (excluding interest) at any time for whatever reason.
To use up to $10,000 in interest earnings for the purchase of a principal residence tax-free.
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