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The Roth 403(b)

For 2006, a new form of the 403(b) plan emerged on the scene: the Roth 403(b). This was a child of the Economic Growth and Tax Relief Reconciliation Act that took effect in 2006. Employers who provide 403(b) plans to their employees now have the option to offer this new version as well. Essentially, the Roth 403(b) works the way a Roth IRA works: any contributions made to the plan are not eligible for tax deduction. However, when the funds are withdrawn (provided that you're at least age 59½ and your account is at least five years old), they are not taxed. An extra bonus is that any growth in the account, whether by appreciation or earnings that you reinvested, is also not taxed.

There are no yearly income limits that you must fall into in order to contribute to a Roth 403(b).

There are no yearly income limits that you must fall into in order to contribute to a Roth 403(b). Also, you may contribute to both a standard 403(b) and a Roth 403(b), provided that you do not exceed the yearly maximum.

Employers may contribute matching funds to their employees' Roth 403(b)s. However, these matching funds are not after-tax, like the contributions made by employees. They are before-tax, meaning that they must be kept separate from Roth account funds. Upon withdrawal, then, the matched portion of the accounts will be subject to federal income tax.

As with standard 403(b)s, you will be penalized for taking withdrawals before age 59½. You will be required to take distributions beginning at the age of 70½. On your income tax forms, your Roth distributions will not be counted as income; those matched by your employer will be.

Is the Roth 403(b) for you? It can certainly be advantageous if you expect to be in a higher tax bracket after age 59½ than you are today. Thus, it may help for you to determine whether tax breaks now or tax breaks later in life will be more important.

Even if you are unsure about your future tax rates, a Roth 403(b) might still be to your benefit. It may be worthwhile to consult a financial planning professional who will work through a variety of hypothetical scenarios with a computer to help you make an informed decision.