Penn faculty and staff will have another savings vehicle to consider for their retirement portfolios beginning July 1. The Roth 403(b), which is similar to a Roth Individual Retirement Account, will be added to the many options employees can select with either of Penn’s retirement vendors –- TIAA-CREF and Vanguard.
The Roth 403(b) is simply another way to put money aside for retirement. As with a Roth IRA, money set aside in a Roth 403(b) is taxed as it is deposited, while distributions taken during retirement are generally tax-free.
Roth 403(b) plans, however, have higher contribution limits than their IRA counterparts, so employees can accumulate more tax-free income for retirement.
Keep in mind that Roth after-tax contributions will not reduce your taxable income as pre-tax selections do, and your paycheck will be reduced by additional tax withholdings. A combination of pre-tax and Roth after-tax deferrals are allowed, but only up to your annual pre-tax limit: $16,500 or $22,000 for those age 50 or older.
You should also consider the timing of your retirement. Participants must wait five years to make a “qualified distribution” or tax-free withdrawal from a Roth 403(b), and you must be at least 59 and one-half years old to make a withdrawal or penalties will be assessed. Also, federally required minimum distribution rules apply at age 70.
In general, Roth 403(b) accounts are most beneficial to individuals who have a long time until retirement and, thus, more time to accumulate tax-free savings. Those nearing retirement age who want to maximize their flexibility in tapping retirement accounts might also have an interest in this plan. This includes individuals who want to have access to a pool of tax-free money to draw from but are not eligible for a Roth IRA because of income limitations.
Participating is easy. Shortly before the plan takes effect on July 1, employees can sign up using Penn’s online enrollment system at www.hr.upenn.edu/retirement.
Employees are encouraged to discuss the Roth 403(b) with a financial advisor to determine whether it is a good match for them. Faculty and staff can schedule free one-on-one counseling sessions with either TIAA-CREF or Vanguard by clicking here.
Originally published on April 29, 2010