Is a Roth 401(k) or Roth 403(b) Right for You?

Employer-sponsored retirement plans allow you to save for retirement and, in some cases, earn an employer match. In addition to regular 403(b) or 401(k) retirement savings options, employers can add a Roth 403(b) or 401(k) option to the retirement plans they sponsor. 

403(b) and 401(k) – Who Can Invest?

If you work at a school or certain nonprofit organizations, your retirement options might include a 403(b) or Roth 403(b). Employees at for-profit companies may have a 401(k) or Roth 401(k) available to them.

If your employer offers the Roth option, you may choose to designate all or a portion of your retirement contributions to the plan as Roth contributions.


Roth 401(k) vs Traditional 401(k)

Whether it’s a Roth 403(b) or 401(k), Roth accounts are funded by employees with after-tax dollars. These contributions do not reduce your taxable income like contributions to a traditional 401(k) or 403(b) do, but they provide the potential for long-term benefits. You can later withdraw funds without paying taxes on the earnings, because you already paid tax on your contributions.


Roth 401(k) Contribution Limits

The annual contribution limits are the same for traditional 403(b) and 401(k) and Roth 403(b) and 401(k) contributions: a combined limit of $19,500 for 2021.

If you are age 50 or older, you may be able to make a "catch-up" contribution of an additional $6,500 for 2021.The IRS also has special provisions for 403(b)s so that employees with at least 15 years of service can make even more catch-up contributions. 

If you receive matching contributions, the employer match money and any earnings on it will be held in a separate account from your contributions. Because the employer’s match to your Roth contribution wasn’t taxable income to you when the contribution was made, the employer’s match is taxable as ordinary income when you withdraw it.

What does “combined limit” mean?

The combined contribution limit is the total you can contribute across all types of employer sponsored plans in which you participate. In 2021, the maximum across all plans is $19,500.

You can divide contributions between the traditional and Roth options in a plan, as long as you don't exceed the annual limits.

Roth 401(k) Withdrawals

Like a Roth IRA, the Roth 403(b) and 401(k) offers tax-free withdrawals if the account is at least five years old and you are at least age 59½. Early withdrawals may be subject to income taxes and a 10% penalty tax. Generally, tax-free withdrawals can only be made upon reaching age 59½, severance of employment or if a plan terminates. Other circumstances, such as hardship, death and disability may depend on what your plan allows.

Unlike the Roth IRA, the Roth 403(b) and 401(k) do not allow penalty-free withdrawals for special purposes, such as a first-time home purchase.

If you leave your employer, you may be able to roll over distributions from a Roth 401(k) to a Roth IRA or another 401(k) or 403(b) plan that accepts Roth contributions to keep the money in a tax-advantaged account. You must begin taking required minimum distributions from a Roth 401(k) or a Roth 403(b) at a certain age1, which is different from Roth IRA rules but consistent with the traditional 401(k) and 403(b) rules.

Why the Roth 403(b) or 401(k) Might Be for You

If your employer offers a Roth 403(b) or 401(k), consider the following benefits:

Tax-free withdrawals:  

Roth 403(b) or 401(k) withdrawals are not taxed as ordinary income like they are from a traditional 403(b) or 401(k). Remember that early distributions may be subject to income taxes and a 10% penalty tax.

No income restrictions:

A Roth 403(b) or 401(k) does not limit or restrict contributions if your adjusted gross income is above a certain amount like a Roth IRA does.

Higher contribution limits:

If you want to take advantage of a Roth account, the Roth 403(b) or 401(k) has higher contribution and catch-up limits than a Roth IRA. You may be eligible to contribute to both a Roth IRA and a Roth 403(b) or 401(k).

No income tax for your beneficiaries:

The beneficiaries of your Roth 403(b) or 401(k) will not have to pay income tax on your contributions and earnings in the account if it was open for at least five years. (Estate tax may still apply.) However, they will owe taxes on any employer match contributions when the money is withdrawn. Traditional 403(b) or 401(k) money is fully taxable to heirs.

The Roth 401(k) or 403(b) may not be for everyone. For example, it may not be for you if you anticipate being in a lower tax bracket in retirement. That's because you would have paid taxes at a higher rate when you contributed the money (since Roth contributions are made with after-tax money).

Carefully consider all of your options for retirement investing before deciding which type of account or accounts will be most appropriate for you.

Need help with your retirement plan options?

1The SECURE Act, effective January 1, 2020, changed the age at which RMDs begin.

  • If you were born before 7/1/1949, you must begin RMDs at age 70½.
  • If you were born on or after 7/1/1949, you must begin RMDs at age 72.

This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.

This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.