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How a Roth 403(b) works

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Working for a church, school, hospital or other tax-exempt organization often lets you help others while providing for yourself and your family. These employers usually offer a 403(b) retirement plan so you also can look out for your future self.

If your employer offers this type of plan, you may have the option to choose between a traditional 403(b) or Roth 403(b). Let's dig into their similarities and the Roth specifics to help you make a decision.

What is a 403(b)?

A 403(b) is an employer-sponsored retirement savings plan that's like a 401(k) but only for employees who work for certain public-sector or tax-exempt employers. You can use it to save for your retirement via payroll deductions, and you get certain tax advantages for doing so. The tax treatment depends on whether you choose traditional or Roth, but many 403(b) features are the same for both options:

2023 & 2024 403(b) contribution limits

You and your employer can put money directly from your paycheck into your 403(b) retirement plan up to the annual IRS limits.

  • 2023: Up to $22,500 of your own salary if you are under age 50.
  • 2024: Up to $23,000 of your own salary if you are under age 50.
  • For people age 50 or older: You can add an additional catch-up contribution of $7,500 on top of the annual limit.

Your employer may choose to make matching contributions in addition to what you contribute. The combined employee-employer contributions can't exceed $66,000 in 2023 or $69,000 in 2024, or 100% of your annual salary (whichever is less).

403(b) investment options

With a 403(b), you most likely will have access to annuities and mutual funds that invest in stocks and bonds. Your employer will select the investment company—many pick just one vendor for all employee retirement plans—but you typically get to control your own investment options under that vendor.

How does a Roth 403(b) work?

A Roth 403(b) functions similarly to a traditional 403(b). It lets employees of public-sector or tax-exempt organizations save for retirement while potentially receiving an employer match. The main difference comes down to how you're taxed on contributions and withdrawals.

How are Roth 403(b) contributions taxed?

Roth 403(b) contributions are made with dollars that you've already paid taxes on. That means that when it's time to take distributions in retirement, you won't have any additional tax liability if you meet the requirements for a “qualified withdrawal.”

Traditional 403(b) contributions essentially work the opposite way. With those, you contribute pre-tax dollars but pay income taxes on all contributions and their earnings when you withdraw money from the account when you retire or reach age 59½. That means when it’s time to take distributions in retirement, you will pay income tax on the contributions and earnings and potentially a 10% penalty, depending on your age.

Employer matching contributions

Due to the SECURE Act 2.0, employers now be able to contribute a match into Roth 403(b) accounts. Previously, employer contributions only could go into a traditional 403(b) account.

Your employer sets the amounts and terms. You'll have to include any Roth-matching contributions in your taxable income as you receive them, but after that, the employer contributions can grow tax-free alongside your own. Talk to your employer about the matching options available to employees.

Roth 403(b) earnings & qualified withdrawals are tax-free

The investment earnings in a Roth 403(b) account grow tax-free, which puts them into a "tax never" bucket and makes them a smart choice to bring tax-efficiency into your retirement savings plan. Withdrawals are also tax-free as long as you're at least 59½ and have held the account for at least five years. Diversifying your investments so they're taxed at different points in your life is a good way to help reduce your tax liability once you retire.

However, if you withdraw money—or take a distribution—from your Roth 403(b) without meeting the requirements of a qualified withdrawal,1 then income taxes and a 10% penalty may apply.

Also thanks to the SECURE Act 2.0, Roth 403(b)s aren't subject to required minimum distributions starting in 2024. That means you won't be forced to make a certain amount of withdrawals every year after you reach a certain age.

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Why would you choose a Roth 403(b) over a traditional 403(b)?

Roth 403(b) plans can offer a tax-efficient savings strategy, reducing your tax bill throughout your lifetime—particularly in retirement. To consider what a traditional vs. Roth 403(b) might mean for you, compare your current tax rate to the tax rate you expect to have in retirement.

  • If you think you're currently at peak earnings potential and expect to be in a lower tax bracket in retirement, a traditional 403(b) may be appropriate.
  • If you don't think you've reached your peak earnings point yet and expect to be in a higher tax bracket in retirement, then it may make more sense to go with a Roth 403(b).

Can you have both a traditional 403(b) & a Roth 403(b)?

Yes, you can have both, but your combined contributions can't exceed the IRS-set annual limits listed previously.

Is a Roth 403(b) right for you?

A Roth 403(b) gives you the ability to build a tax-free retirement nest egg. This can be a valuable source of security and financial stability in retirement. Whether it's right for you depends on your personal tax situation both now and in the future. A Thrivent financial advisor can help you look at your choices and big-picture needs to decide.

1Distributions of earnings are tax-free as long as your Roth 403(b) is at least five years old and one of the following requirements is met: (1) you are at least age 59½; (2) you are disabled; (3) you are purchasing your first home ($10,000 lifetime maximum); or (4) the money is being paid to a beneficiary.

While diversification can help reduce market risk, it does not eliminate it. Diversification does not assure a profit or protect against loss in a declining market.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.