Tips to Choose Between a Traditional vs. Roth 403(b) Plan

If you’re an employee of a nonprofit organization, you might be able to participate in a 403(b) plan. This employer-sponsored, tax-advantaged plan helps employees reach their retirement goals.

Although the traditional 403(b) plan remains popular, many employers are offering Roth 403(b) plans. Understanding the similarities and differences between the plans helps you determine which might better suit your needs.

Similarities Between a Traditional and Roth 403(b) Plan

A traditional and Roth 403(b) plan have the following similarities:

• No income limits

• High contribution limits that can annually change

• Potential employer matching contributions up to a percentage of an employee’s salary or savings rate

• Diverse investment options and asset allocation models aligned with personal risk tolerance and savings goals  

• Tax benefits

• The ability for employees to save significant amounts of money for retirement

• Flexibility

• Portability

Differences Between a Traditional and Roth 403(b) Plan

The differences in tax treatment between a traditional and Roth 403(b) plan impact an employee’s tax burden during their working years:

Traditional 403(b) 

• Contributions are made before payroll taxes are withheld.

• The contributions reduce an employee’s taxable income.

• The employee can experience significant tax savings over time, especially if they are in a higher tax bracket.

• Distributions are taxed as ordinary income.

Roth 403(b)

• Contributions are made after payroll taxes are withheld.

• The contributions and earnings grow tax-free.

• The employee can experience significant tax savings over time, especially if they anticipate being in a higher tax bracket during retirement.

• Distributions are tax-free if the account is held for 5 years and the participant reaches age 59 ½, becomes disabled, or passes away, leaving the account to a beneficiary.

Tips to Choose Between a Traditional vs. Roth 403(b) Account

These tips can help you decide whether a traditional or Roth 403(b) account, or one of each, would be best for you:

• A traditional 403(b) might be best during your peak working years. A lower taxable income today allows for long-term growth potential.

• A Roth 403(b) might make sense if you are young and in a lower tax bracket. Paying taxes now, at a lower rate, lets your money grow tax-free for retirement.

• Traditional and Roth 403(b) contributions provide tax diversification. You gain flexibility with future withdrawal strategies based on future tax rates.

Consider talking with a licensed financial representative or tax professional to determine whether a traditional or Roth 403(b) account, or one of each, would be best for your circumstances and goals.

*This information is for educational purposes only.