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Is a Roth Employer Plan Contribution Right for You?

Navigate the ins and outs of Roth 401(k) and Roth 403(b) features in employer retirement plans.


Key Takeaways

Not-for-profit employers generally offer 403(b) retirement plans, while for-profit employers offer 401(k) plans to employees.

Regular 401(k) and 403(b) retirement plans are funded with pre-tax dollars. Roth plan contributions are made with after-tax dollars.

Understanding contribution, withdrawal and tax rules for each contribution type can help you decide which one is best suited for your situation.

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

Here’s a review of the employer-offered options to help you decide what’s right for you.

Traditional vs. Roth Designation

Like traditional and Roth IRA accounts, traditional and Roth contributions have different characteristics and tax benefits to help you save.

With traditional 403(b) or 401(k) features, employees make contributions with pre-tax dollars. That provides an up-front tax break that can lower income taxes.

Roth accounts are funded by employees with after-tax dollars. These contributions do not reduce your earned taxable income like traditional 401(k) or 403(b) contributions do, but they still provide the potential for long-term benefits. You can later withdraw funds without paying taxes on the original contribution amount or earnings because you already paid tax on your contributions. (However, earnings will be taxed upon withdrawal if the Roth account has not been opened at least 5 years and you are not at least age 59½.)

Employer Matches

If you receive an employer match on your Roth contributions, the employer matching contributions and their associated earnings are held in a separate account from your own contributions. Because the employer’s match on your Roth contribution wasn’t taxable income to you when the matching contribution was made, the employer’s match (including earnings) is taxable when you withdraw it.¹

403(b) vs. 401(k): What’s the Difference?

While 403(b) and 401(k) plans share many of the same characteristics, including contribution limits and tax advantages, they have some key differences.

The first is who can participate in each plan. If you work at a school or certain nonprofit organizations, your retirement options might include a 403(b). Alternatively, employees at for-profit companies may have a 401(k) available to them. If your employer offers a Roth option, you may choose to designate all or a portion of your retirement contributions to the plan as Roth contributions.

The investment options within 401(k) and 403(b) plans differ as well. Most 401(k) plans allow employees to invest in a variety of investment options, including mutual funds, exchange-traded funds, collective investment trusts, and sometimes individual stocks and bonds through a brokerage platform. On the other hand, under federal law, 403(b) plan investments are typically limited to mutual funds and annuities.

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; however, your contributions are subject to a combined limit. The combined contribution limit is the total you can contribute across all types of employer-sponsored plans in which you participate. The maximum across all plans increased to $23,000 for 2024.

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

If you are age 50 or older, you may be able to make a “catch-up” contribution of an additional $7,500 in 2024. 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.

SECURE 2.0 Act and Catch-up Changes

A provision of the SECURE 2.0 Act required that catch-up contributions for those with a modified adjusted gross income of $145,000 or more (indexed to inflation) be made as Roth contributions starting in 2024. In essence, tax-deferred catch-up contributions would no longer be allowed for these high-earners. Employee benefit plan administrators balked at the short time frame to comply with this provision, causing the IRS to delay enactment until 2026.

For now, high earners have another couple of years to make catch-up contributions in tax-deferred 401(k) and 403(b) accounts.

Roth 403(b) and 401(k) Withdrawals

Like a Roth IRA, a Roth 403(b) and Roth 401(k) offer 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.

Unlike the Roth IRA, the Roth 403(b) and Roth 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 distributions2 from a Roth 403(b) and Roth 401(k) to a Roth IRA or another 403(b) or 401(k) plan that accepts Roth contributions to keep the money in a tax-advantaged account.

Starting in 2024, you are no longer required to take required minimum distributions (RMDs) from a Roth 403(b) or Roth 401(k), which is consistent with Roth IRA rules. (Note, you must still take RMDs from designated Roth 403(b) and/or 401(k) accounts for 2023, including those with a required beginning date of April 1, 2024.)

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

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

  • Tax-free withdrawals. Qualified Roth 403(b) or Roth 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 RMDs. As stated above, the IRS will no longer require distributions from Roth 403(b) or 401(k) plans starting in 2024.

  • No income restrictions. A Roth 403(b) or Roth 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 Roth 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 Roth 401(k).

  • No income tax for your beneficiaries. The beneficiaries of your Roth 403(b) or Roth 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 and associated earnings when the money is withdrawn. Traditional 403(b) or 401(k) money is fully taxable to heirs.

Maximizing Your Retirement Savings

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

A Roth 401(k) or Roth 403(b) may not be for everyone. For example, it may not be beneficial 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). If this is the case, then maxing out your non-Roth 401(k) or 403(b) may provide immediate tax savings and allow you to invest more money upfront.

On the other hand, if you believe your tax bracket will stay the same or be higher in retirement, or if you value the flexibility of tax-free withdrawals, the Roth 403(b) or Roth 401(k) offers a strategic choice.

Finally, don’t forget about the employer match. This ”extra” money can significantly boost the growth of your retirement nest egg. For example, your employer might match $0.50 for every $1 you contribute up to 6% of your salary. If you make $50,000 per year, and contribute 12% of your salary to your plan, they will match $3,000 (0.06 x $50,000). A match is an instant return on your investment, so long as you stay with your employer for the amount of time it takes for those amounts to vest (or become 100% yours).

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The SECURE 2.0 Act allows plans to add an optional provision where you may be able to elect to have employer matching contributions be made to your plan on a Roth basis, which means they would be taxable when contributed and not taxed at withdrawal (assuming the withdrawal is qualified). Contact your plan’s administrator to find out if this option is available to you.

If a client rolls Roth sources in these plans to a new Roth IRA, the 5-year requirement starts at rollover in order to take penalty-free withdrawals from a newly established Roth IRA.

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.

You could lose money by investing in a mutual fund, even if through your employer's plan or an IRA. An investment in a mutual fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

This information is for educational purposes only and is not intended as a personalized recommendation or fiduciary advice. There are different options available for your retirement plan investments. You should consider all options before making a decision. Our representatives can help you evaluate all of your distribution options.

IRA investment earnings are not taxed. Depending on the type of IRA and certain other factors, these earnings, as well as the original contributions, may be taxed at your ordinary income tax rate upon withdrawal. A 10% penalty may be imposed for early withdrawal before age 59½.

Please consult your tax advisor for more detailed information regarding the Roth IRA or for advice regarding your individual situation.

Taxes are deferred until withdrawal if the requirements are met. A 10% penalty may be imposed for withdrawal prior to reaching age 59½.