Rebecca Lake, CEPF«

A Roth 403(b) plan is one type of tax-advantaged, employer-sponsored retirement savings account that combines elements of a Roth IRA and a traditional 403(b). While these plans share some similarities with 401(k) plans, they have certain characteristics that set them apart. For more hands-on guidance as you navigate the ins and outs of a Roth 403(b) plan, consider finding an experienced financial advisor to help guide your efforts.

What Is a Roth 403(b) Plan?
A 403(b) plan is a retirement account that public school employees, employees of
tax-exempt organizations and certain ministers can enroll in. Examples of public
school and tax-exempt employees who may be eligible to contribute to a 403(b)
plan include teachers, administrative staff, doctors, nurses, librarians and
custodians.

A Roth 403(b) plan is a 403(b) that the IRS designates as a Roth designated account. This means that Roth 403(b) plans adhere to the same contribution and withdrawal rules as Roth 401(k) accounts. Unlike a Roth individual retirement account, there are no income restrictions on who can contribute to a Roth 403(b); employment alone determines eligibility.

How Roth 403(b) Plans Work
Both employees and employers can make contributions to a Roth 403(b) plan. For
2023, employees can make elective salary deferrals of up to $22,500 (up from $20,
500 in 2022). An additional catch-up contribution of $7,500 ($6,500 in 2022) is
allowed for employees aged 50 or older. Those are the same limits that apply to
a traditional or Roth 401(k).

Employers can choose to make matching contributions to employee plans, but they're not required to do so. The combined limit on annual contributions, which includes both employee and employer contributions, is $66,000 for 2022 (up from $58,000 in 2021) or 100% of the employee's compensation for the most recent year of service, whichever is less.

Something distinctive about 403(b) plans is that if the plan allows for it, employees who have at least 15 years of service with a public school system, hospital, home health service agency, health and welfare service agency, church or association of churches can make additional catch-up contributions. The amount they could contribute above the annual limit is the lesser of:

$3,000
$15,000, reduced by the amount of additional elective deferrals made in prior
years because of this rule, OR
$5,000 times the number of the employee's years of service, minus total elective
deferrals made for earlier years
If an employee is eligible for this catch-up contribution limit, plus the
regular $6,500 catch-up contribution limit, the IRS requires the employee to
make the 15-year catch-up contribution first, up to the limit he or she is
eligible for. Then, they can make catch-up contributions up to the $6,500 annual
limit, up to the amount that total contributions don't exceed the combined limit
for employer and employee contributions.

It sounds complicated, but essentially 15-year employees can potentially get three bites at the apple: first with their regular elective salary deferrals, then with the 15-year catch-up contribution and finally, with the regular catch- up contribution.

Roth 403(b) vs. Roth IRA
While both the Roth 403(b) and the Roth IRA are retirement savings tools, they
vary quite a bit. Where a Roth 403(b) is a tool that is used by businesses or
employers to provide retirement savings opportunities to employees, a Roth IRA
is an individual retirement account that anyone can invest in on their own.

The Roth IRA can be opened at pretty much any major brokerage and the individual can manage all of their own investments. This type of account also generally has smaller limits on how much you can contribute on an annual basis. The Roth IRA also does not allow contributions by another individual or entity into your account.

If something goes wrong with your Roth IRA account you'll contact your brokerage directly whereas with a 403(b) account you would contact your employer. This is a big difference if you're looking to move your investments or determine where your contributions are at for the year.

403(b) Tax Considerations
Roth accounts - whether it's a Roth 401(k), Roth IRA or Roth 403(b) - are funded
with after-tax dollars by employees. Qualified withdrawals of employee
contributions and earnings are tax-free in retirement.

Cliff Caplan, a certified financial planner at Neponset Valley Financial Partners in Norwood, Massachusetts, says a 403(b) plan can be particularly beneficial to younger workers who have years to grow their retirement savings. Someone who has yet to reach his or her peak income-earning years may see more value from contributing to a Roth 403(b) if the person is in a higher income tax bracket in retirement. That's because qualified withdrawals wouldn't increase the person's tax liability.

The trade-off, of course, since employees fund contributions to a Roth 403(b) with after-tax dollars, is that those contributions are not tax-deductible the way they would be with a traditional 401(k) or 403(b) plan.