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What You Need to Know About Roth 403(b) Plans and Tax Advantages

Triston Martin

Jan 05, 2024

Nonprofit employees can save for retirement in a tax-advantaged manner through Roth 403(b) plans. Roth 403(b) plans are similar to standard 403(b) plans in that they permit employees to set aside money each pay period for retirement. However, unlike traditional 403(b) contributions, Roth 403(b) contributions are made with after-tax funds and do not qualify for an instant tax deduction. The withdrawal tax treatment sets a Roth 403(b) plan apart from others. Under some circumstances, contributions and earnings distributed from a Roth 403(b) plan qualify for tax-free treatment. Participants can benefit from potential tax-free growth and greater leeway in their retirement strategies.

In addition, by allowing participants to contribute to standard and Roth IRAs, Roth 403(b) plans provide individuals with tax diversification. By doing so, individuals will have more options for handling their retirement tax burden by establishing a combination of pre-tax and post-tax savings. Roth 403(b) plans also have the potential to improve legacy planning due to the tax-free transfer of assets to beneficiaries upon account termination.


One of its most attractive characteristics is that contributions to a Roth 403(b) plan are made with after-tax monies. In contrast to a standard 403(b) plan, participants in these arrangements do not receive an immediate tax benefit for their contributions. However, eligible withdrawals from a Roth 403(b) plan are free from taxes under this strategy.

Contribution Limits

Regarding Roth 403(b) plans, the IRS sets and periodically adjusts the contribution limits. In 2021, anyone under 50 can contribute up to $19,500 annually. The yearly contribution cap for those 50 or older is raised to $26,000 thanks to the catch-up provision.


Withdrawals from a Roth 403(b) plan can be tax-free under specific circumstances. The first requirement is that the account has been active for at least five years. Second, the taxpayer must be 59, 12, or older unless an IRS exception applies (such as a disability or death). A 10% penalty on top of income tax may be used for early withdrawals if these requirements aren't met.

Contributions From The Employer

Employee contributions to a Roth 403(b) plan are made after taxes, but matching employer contributions are made before taxes. The matching contributions will be considered taxable income when they are eventually withdrawn. Employee contributions are not eligible for an immediate tax deduction, but the company match can significantly boost retirement savings (with tax consequences upon withdrawal).

Rollovers And Portable Devices

Rollovers and transfers between Roth 401(k)s are possible. To avoid paying taxes twice, former employees can usually transfer their Roth 403(b) to a Roth IRA or another qualified retirement plan when they leave their current workplace. By being able to take their Roth contributions with them when they leave one job for another or retire, individuals can ensure that their retirement funds continue to grow tax-efficiently.

Tax Diversification

Tax diversification in retirement savings is possible with a Roth 403(b) plan. Employees can diversify their retirement assets by contributing to a pre-tax and post-tax 403(b) plan. Because of this wiggle room, retirees can choose which funds to tap depending on their unique tax position. Saving for retirement with various tax strategies in mind can assist in maximizing tax efficiency and give you more control over your retirement income.

Benefits Of Estate Planning

Roth 403(b) plans are helpful for estate planning in several ways. The funds in a Roth 403(b) plan will not be liable to federal estate tax if they are distributed to beneficiaries after the account holder's death. Leaving a tax-efficient inheritance and guaranteeing that one's loved ones can benefit from retirement funds can be valuable in one's overall legacy planning approach.


Roth 403(b) plans are a robust retirement savings tool for employees of tax-exempt organizations. With proper planning, participants can withdraw their after-tax contributions tax-free in retirement. This tax benefit, coupled with tax diversification options and advantages for estate planning, makes Roth 403(b) plans attractive. Although contribution limitations and employer matching contributions are essential factors, the opportunity for tax-free growth and distributions can significantly improve one's retirement savings. Employees can better prepare for retirement and achieve their long-term financial objectives if they know the laws and tax benefits of Roth 403(b) plans.

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