Roth 403(b) Contributions
Roth 403(b) contributions and, unlike Traditional 403(b) elective deferral contributions, are subject to Federal and State income tax withholdings (also referred to as after-tax deferrals). The distribution of an employee's contributions to a Roth 403(b) account are not taxable at distribution, since taxes were paid on the contributions to the account in the year they were deferred. If a distribution from a Roth 403(b) account is "qualified", the gains on the account are also distributed tax-free. For a distribution from a Roth 403(b) account to be “qualified,” it must meet two conditions:
- Payment must be made after age 59 ½, disability, or death, and
- The Section 403(b) account must have been in existence at least five
taxable years (i.e., calendar years).
Termination of employment before age 59 ½, disability, or death does not
trigger a qualified distribution. In such an event, to qualify for a
tax-free distribution, the employee will either need to leave the Roth
account in the Section 403(b) program until age 59 ½ or roll it over to a
Roth IRA, a designated Roth 401(k) account, a designated Roth governmental
457(b) account, or another designated Roth 403(b) account.
Qualified distributions are completely free of federal income tax. This
result means that the investment gains are never taxed for federal income
Your Employer May Not Offer the Roth 403(b) Contribution Option
Employers that currently sponsor Traditional 403(b) Programs are not required to allow participants to make Roth contributions. Visit the Employee Entrance section of this website to determine if you will be able to make Roth 403(b) contributions. Note: If 403(b) Roth contributions are allowed in your employer's plan, the Salary Reduction Agreement will have a section to designate the amount to defer to the Roth account.
Some Vendors Will Not Offer the Roth 403(b) Contribution Option
If you are interested in making Roth contributions, first check to make sure that your Employer allows Roth contributions by visiting the Employee Entrance, and then further click on the specific vendor to see if that vendor will accept Roth contributions.
New Opportunities for In-Plan Roth Conversions/Rollovers and Roth 457(b) Accounts (2010)
In September of 2010, President Obama signed into law the Small Business Jobs Act, which allows conversions/rollovers of Traditional 403(b) accumulated funds into Roth 403(b) accounts for participants eligible for distributions (must attain age 59-1/2 if still employed by the employer sponsoring the 403(b) plan) and opens the door for Roth contributions in 457(b) plans beginning January 1, 2011. There is a special provision that allows distributing resulting Federal income taxes on 2010 Roth conversions/rollovers over taxable years 2011 and 2012, but time is extremely short and numerous issues were raised initially about doing so (see the Warner Norcross & Judd article below). However, the IRS has now provided guidance in Notice 2010-84 (see link below) and the Journal of Accountancy article linked to below provides explanations of the salient features in layman's terms.
Click here for a copy of IRS Notice 2010-84.
Click here for the Journal of Accountancy article.
Click here for the Warner Norcross & Judd, Attorneys at Law, article.
Click here for an article published by Spencer Fane Britt & Browne, LLP Attorneys & Counselors at Law.
Useful Roth Contribution Links
You may find it helpful to review some of the websites listed below. Check this list periodically, since additional links will be provided as they become available. Most information about Roth contributions on the Internet deal with Roth 401(k) accounts, but the rules associated with Roth 401(k) and Roth 403(b) are almost identical, so articles about Roth 401(k) accounts are generally helpful in understanding Roth 403(b) accounts.
Roth vs Traditional Comparisons