Traditional 403(b) vs. Roth 403(b) — Which is Right For You?

Traditional 403(b) vs. Roth 403(b) — Which is Right For You?

The Michigan District Commission on Ministerial Growth and Support would like to pass along the following article regarding Traditional vs. Roth retirement options since many will need to be making that decision with the upcoming school year.

Now that Concordia Plan Services is offering a Roth Option with the Concordia Retirement Savings Plan (CRSP), many church workers are wondering whether the traditional pre-tax option or the Roth option would be the best way for them to save. Depending on personal financial goals, it might be one or the other—or a combination of both!  (“Roth” is a provision which allows distributions from a qualified plan to be withdrawn free of income tax.)

Traditional Option

Roth Option

– Worker contributes to the CRSP on a pre-tax basis;

– Because contributions are withheld pre-tax, the worker will pay lower income tax (and SECA tax, if applicable), and potentially lower their tax bracket;

– Earnings grow and compound year after year without being reduced by taxes each year;

– Distributions will be subject to income tax.

– Worker contributes to the CRSP on an after-tax (including SECA tax) basis;

– Earnings grow and compound year after year without being reduced by taxes each year;

– Distributions would typically be tax- and penalty-free if the following conditions are met:

– The Roth account must be held for a minimum of five years; and

– The worker has either reached age 59½, is disabled, or (if there’s a beneficiary) is deceased.

So, which option might benefit you?

Those who might want to consider the traditional pre-tax option could include:

  • Workers who expect to be in a lower tax bracket after retirement;
  • Ministers of religion who pay SECA taxes, as the immediate 15.3% savings received with the pre-tax option would not be realized with the Roth option, and distributions from the pre-tax option would not be subject to SECA taxes, either.

Those who might want to consider the after-tax Roth option could include:

  • Young workers who have more time to accumulate tax-free earnings;
  • Workers who expect to be in a higher tax bracket, or expect to pay a higher tax rate by the time they reach retirement;
  • Workers who want to leave tax-free money to their heirs or other beneficiaries.

If you fall somewhere in the middle, you might want to consider doing both traditional pre-tax and Roth contributions!

Things to Keep in Mind

There are some things to keep in mind, regardless of which option(s) you might choose:

  • The annual contribution limit on the amount you can defer from your salary applies to all 403(b) contributions, whether pre-tax or Roth or a combination of the two.
  • Pre-tax and Roth contributions are remitted by your employer at the same time.
  • The funds lineup in the CRSP is the same for the pre-tax option and the Roth option.
  • Investment choices in the CRSP will be managed in the same manner with Roth contributions as with pre-tax contributions. If you have chosen ProManage to manage your investments, it will apply to both pre-tax and Roth, and if you have chosen your own investment lineup, the same investment choices will apply to both pre-tax and Roth.
  • If your employer is providing a match, both pre-tax and Roth contributions should be included when calculating the amount of the match, but all employer contributions are made on a pre-tax basis, even if you choose to make only Roth contributions, so employer contributions will always be taxed upon distribution.

To get started or to change your contributions, just go to ConcordiaPlans.org and complete a Salary Deferral Agreement.  The same form is used for both pre-tax and Roth elections.  Then return your form to your employer.

If you or your employer are interested in finding out more about the CRSP, or if your employer isn’t currently participating but is interested in adopting the 403(b), please call Concordia Plan Services at 888.927.7526 or send an e-mail to info@concordiaplans.org.

In closing:

  • Please remember to always consult a financial advisor or a tax professional before making personal financial decisions!
  • Whether you choose pre-tax savings or a Roth option, you do need to plan and save for your retirement future!
  • Take advantage of the planning tools available through org (Retirement Connection) and through Fidelity to help you determine your savings goals, and remember to review those goals at least annually!
  • Consider Church Extension Fund (mi-cef.org) Roth IRA investments.

Paul Snyder serves as the Retirement and Benefit Educator with Concordia Plan Services. He will be the keynote speaker at the Michigan District Pre-Retirement Conference January 19–20, 2018.

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