403(b) Smart Choices: Pre-Tax or Roth?
For school employees, a 403(b) retirement plan can be a great way to supplement the Teacher Retirement System pension. It offers significant tax benefits while you build savings for the future. One important feature of a 403(b) plan is your ability to make pre-tax or Roth contributions.
Pre-tax contributions are deducted from your pay and transferred to the 403(b) plan before federal (and most state) income taxes are calculated. This reduces your current taxable income — you don't pay income taxes on the amount you contribute, or any investment gains on your contributions, until you receive payments from the plan.
Roth contributions are made on an after-tax basis. Unlike pre-tax contributions, there's no up-front tax benefit — your contributions are deducted from your pay and transferred to the plan after taxes are calculated. Under current law, a qualified distribution from your Roth 403(b) account is entirely free from federal income tax.
Should you make pre-tax or Roth contributions? If you think you'll be in a higher tax bracket when you retire, Roth contributions may be more appealing, since they are designed to effectively lock in today's lower tax rates (and future withdrawals will generally be tax free). However, if you think you'll be in a lower tax bracket when you retire, pre-tax contributions may be more appropriate because your contributions reduce your taxable income now.
In 2021, you can contribute up to $19,500 ($26,000 if you're age 50 or older) to a 403(b) plan. If your plan allows Roth 403(b) contributions, you can split your contribution between pre-tax and Roth contributions any way you wish.
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