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403 B Roth Option pros /cons
#1
Posted 28 May 2006 - 07:53 PM
I was wondering if anyone has any expertise as to how difficult it is for a school system to add a 403b roth?
Is it just a matter of paperwork?
Also can anyone address the pros of a 403b roth ober a regular 493b tax shelter?
I do my own reading but I enjoy hearing from 403bwise folks who always offer fresh and truthful perspective
Thanks,
Tony
#2
Posted 29 May 2006 - 01:57 PM
I don't have actual experience with this, but there are at least a few things the school district will have to do:
1. Find a financial products vendor willing to support it. Most of the work must be done by the vendor, since different tax and accounting rules apply. It can easily cost hundreds of thousands of dollars to make the necessary changes -- and this for a benefit that expires in a few more years under current law. Not many vendors have announced that they are, in fact, supporting Roth 403(b) contributions.
2. The district should have a written plan dcoument to outline both the Roth and the non-Roth plans. This will probably be mandated under the final 403(b) regulations due out soon, but even if it isn't, it would be a bad idea to have two plans with no formal document to distinguish them.
3. A separate payroll slot will have to be provided for any vendor offering a Roth 403(b) account. In districts that have limited slots, this alone may be a major impediment.
4. Some kind of education program for participants is a near necessity. It would be irresponsible to offer two kinds of plans without providing some basis for employees to choose between them.
There are potential advantages to each kind of plan. Our company is a software company, so we have no stake in which one people choose -- and our recommendation would normally be that people put some money into BOTH plans, if they can.
Here's a fundamental mathematical reality that most people don't know: On an AFTER-tax basis, if you put the same amount into both plans, earn the same return from both, and withdraw the same amounts from both at the same time, you will end up with exactly the same amount of money -- PROVIDED your tax rate stays the same when you make withdrawals as it is when you make contributions. There is no inherent advantage to either scheme. So which is better depends on circumstances, not all of which you control.
Main advantages of Roth accounts:
1. You can, in reality, contribute more on an after-tax basis in a Roth account. If your limit is $14,000, you can contribute that amount pre-tax to a traditional 403(b) plan. But, if you pay one-third of your income in taxes, that same $14,000 contribution into a Roth account is the equivalent of $21,000 pre-tax. So if you can afford it, you can shelter 50% more income from taxes, in that case. If you cannot afford to contribute above the existing limits, though, this feature holds no advantage for you.
2. If your tax rate will be higher when you withdaw money than it is now, you are generally better off using a Roth account because you are better off paying your taxes now.
3. Although distributions after age 70-1/2 are required from both kinds of plans, the Roth 403(b) can be rolled over into a Roth IRA which does NOT require distributions to be made before death. This means you can benefit longer from the tax shelter -- assuming you don't need to withdraw money anyway, to pay expenses. As with the 1st item listed above, the main benefit of the Roth plan goes to those who are relatively affluent.
Main advantages of traditional 403(b) accounts:
1. If your tax rate will be lower when you withdraw money than it is now, you are generally better off using a traditional account -- postponing taxes until you pay them at the lower rate. Traditionally, this has been the best bet for most people. Some teachers may actually have higher incomes when they retire, though, depending on the generosity of their regular retirement plan and, of course, on many other factors. In addition, it increasingly seems likely that federal income tax rates are going to have to increase -- perhaps substantially -- in coming years, to prevent future budget deficits and pay for past ones. So this can be a tough call.
2. By taking the tax deduction now, you may be pushing yourself into a lower tax bracket.
3. Some people think that the Roth tax break is not secure. Roth 403(b) plans were authorized by tax laws currently set to expire at the end of 2010, and that have increasingly bleak chances of being extended. So contributions may be possible for only a few years. Furthermore, a future revenue-challenged federal government may decide that the Roth deal was too generous and future earnings or withdrawals may end up being taxed after all, at least in part. Traditional 403(b) plans get their tax advantage immediately, and so it is, in effect, in the bank. Roth plans get their tax advantage based on expectations of future consistency in the tax laws -- not as safe a bet.
Obviously, there are benefits and unknowns on both sides. This is one reason we usually recommend contributing something to both kinds of accounts. In addition, when you do finally retire, if you have both taxable and non-taxable savings to draw from, you can be more tax-efficient. Each year, for example, you could withdraw fully-taxable funds from a traditional 403(b) up to the point where you would be pushed into the next tax bracket, then withdraw non-taxable Roth funds beyond that point, if needed.
Hope this helps...
1. Find a financial products vendor willing to support it. Most of the work must be done by the vendor, since different tax and accounting rules apply. It can easily cost hundreds of thousands of dollars to make the necessary changes -- and this for a benefit that expires in a few more years under current law. Not many vendors have announced that they are, in fact, supporting Roth 403(b) contributions.
2. The district should have a written plan dcoument to outline both the Roth and the non-Roth plans. This will probably be mandated under the final 403(b) regulations due out soon, but even if it isn't, it would be a bad idea to have two plans with no formal document to distinguish them.
3. A separate payroll slot will have to be provided for any vendor offering a Roth 403(b) account. In districts that have limited slots, this alone may be a major impediment.
4. Some kind of education program for participants is a near necessity. It would be irresponsible to offer two kinds of plans without providing some basis for employees to choose between them.
There are potential advantages to each kind of plan. Our company is a software company, so we have no stake in which one people choose -- and our recommendation would normally be that people put some money into BOTH plans, if they can.
Here's a fundamental mathematical reality that most people don't know: On an AFTER-tax basis, if you put the same amount into both plans, earn the same return from both, and withdraw the same amounts from both at the same time, you will end up with exactly the same amount of money -- PROVIDED your tax rate stays the same when you make withdrawals as it is when you make contributions. There is no inherent advantage to either scheme. So which is better depends on circumstances, not all of which you control.
Main advantages of Roth accounts:
1. You can, in reality, contribute more on an after-tax basis in a Roth account. If your limit is $14,000, you can contribute that amount pre-tax to a traditional 403(b) plan. But, if you pay one-third of your income in taxes, that same $14,000 contribution into a Roth account is the equivalent of $21,000 pre-tax. So if you can afford it, you can shelter 50% more income from taxes, in that case. If you cannot afford to contribute above the existing limits, though, this feature holds no advantage for you.
2. If your tax rate will be higher when you withdaw money than it is now, you are generally better off using a Roth account because you are better off paying your taxes now.
3. Although distributions after age 70-1/2 are required from both kinds of plans, the Roth 403(b) can be rolled over into a Roth IRA which does NOT require distributions to be made before death. This means you can benefit longer from the tax shelter -- assuming you don't need to withdraw money anyway, to pay expenses. As with the 1st item listed above, the main benefit of the Roth plan goes to those who are relatively affluent.
Main advantages of traditional 403(b) accounts:
1. If your tax rate will be lower when you withdraw money than it is now, you are generally better off using a traditional account -- postponing taxes until you pay them at the lower rate. Traditionally, this has been the best bet for most people. Some teachers may actually have higher incomes when they retire, though, depending on the generosity of their regular retirement plan and, of course, on many other factors. In addition, it increasingly seems likely that federal income tax rates are going to have to increase -- perhaps substantially -- in coming years, to prevent future budget deficits and pay for past ones. So this can be a tough call.
2. By taking the tax deduction now, you may be pushing yourself into a lower tax bracket.
3. Some people think that the Roth tax break is not secure. Roth 403(b) plans were authorized by tax laws currently set to expire at the end of 2010, and that have increasingly bleak chances of being extended. So contributions may be possible for only a few years. Furthermore, a future revenue-challenged federal government may decide that the Roth deal was too generous and future earnings or withdrawals may end up being taxed after all, at least in part. Traditional 403(b) plans get their tax advantage immediately, and so it is, in effect, in the bank. Roth plans get their tax advantage based on expectations of future consistency in the tax laws -- not as safe a bet.
Obviously, there are benefits and unknowns on both sides. This is one reason we usually recommend contributing something to both kinds of accounts. In addition, when you do finally retire, if you have both taxable and non-taxable savings to draw from, you can be more tax-efficient. Each year, for example, you could withdraw fully-taxable funds from a traditional 403(b) up to the point where you would be pushed into the next tax bracket, then withdraw non-taxable Roth funds beyond that point, if needed.
Hope this helps...
#3
Posted 29 May 2006 - 08:39 PM
This is very good info. Thanks for taking the time.
Tony
QUOTE(Yanikoski @ May 29 2006, 02:57 PM) 
I don't have actual experience with this, but there are at least a few things the school district will have to do:
1. Find a financial products vendor willing to support it. Most of the work must be done by the vendor, since different tax and accounting rules apply. It can easily cost hundreds of thousands of dollars to make the necessary changes -- and this for a benefit that expires in a few more years under current law. Not many vendors have announced that they are, in fact, supporting Roth 403(b) contributions.
2. The district should have a written plan dcoument to outline both the Roth and the non-Roth plans. This will probably be mandated under the final 403(b) regulations due out soon, but even if it isn't, it would be a bad idea to have two plans with no formal document to distinguish them.
3. A separate payroll slot will have to be provided for any vendor offering a Roth 403(b) account. In districts that have limited slots, this alone may be a major impediment.
4. Some kind of education program for participants is a near necessity. It would be irresponsible to offer two kinds of plans without providing some basis for employees to choose between them.
There are potential advantages to each kind of plan. Our company is a software company, so we have no stake in which one people choose -- and our recommendation would normally be that people put some money into BOTH plans, if they can.
Here's a fundamental mathematical reality that most people don't know: On an AFTER-tax basis, if you put the same amount into both plans, earn the same return from both, and withdraw the same amounts from both at the same time, you will end up with exactly the same amount of money -- PROVIDED your tax rate stays the same when you make withdrawals as it is when you make contributions. There is no inherent advantage to either scheme. So which is better depends on circumstances, not all of which you control.
Main advantages of Roth accounts:
1. You can, in reality, contribute more on an after-tax basis in a Roth account. If your limit is $14,000, you can contribute that amount pre-tax to a traditional 403(b) plan. But, if you pay one-third of your income in taxes, that same $14,000 contribution into a Roth account is the equivalent of $21,000 pre-tax. So if you can afford it, you can shelter 50% more income from taxes, in that case. If you cannot afford to contribute above the existing limits, though, this feature holds no advantage for you.
2. If your tax rate will be higher when you withdaw money than it is now, you are generally better off using a Roth account because you are better off paying your taxes now.
3. Although distributions after age 70-1/2 are required from both kinds of plans, the Roth 403(b) can be rolled over into a Roth IRA which does NOT require distributions to be made before death. This means you can benefit longer from the tax shelter -- assuming you don't need to withdraw money anyway, to pay expenses. As with the 1st item listed above, the main benefit of the Roth plan goes to those who are relatively affluent.
Main advantages of traditional 403(b) accounts:
1. If your tax rate will be lower when you withdraw money than it is now, you are generally better off using a traditional account -- postponing taxes until you pay them at the lower rate. Traditionally, this has been the best bet for most people. Some teachers may actually have higher incomes when they retire, though, depending on the generosity of their regular retirement plan and, of course, on many other factors. In addition, it increasingly seems likely that federal income tax rates are going to have to increase -- perhaps substantially -- in coming years, to prevent future budget deficits and pay for past ones. So this can be a tough call.
2. By taking the tax deduction now, you may be pushing yourself into a lower tax bracket.
3. Some people think that the Roth tax break is not secure. Roth 403(b) plans were authorized by tax laws currently set to expire at the end of 2010, and that have increasingly bleak chances of being extended. So contributions may be possible for only a few years. Furthermore, a future revenue-challenged federal government may decide that the Roth deal was too generous and future earnings or withdrawals may end up being taxed after all, at least in part. Traditional 403(b) plans get their tax advantage immediately, and so it is, in effect, in the bank. Roth plans get their tax advantage based on expectations of future consistency in the tax laws -- not as safe a bet.
Obviously, there are benefits and unknowns on both sides. This is one reason we usually recommend contributing something to both kinds of accounts. In addition, when you do finally retire, if you have both taxable and non-taxable savings to draw from, you can be more tax-efficient. Each year, for example, you could withdraw fully-taxable funds from a traditional 403(b) up to the point where you would be pushed into the next tax bracket, then withdraw non-taxable Roth funds beyond that point, if needed.
Hope this helps...
#4
Posted 30 May 2006 - 12:18 AM
I also found your post to be well written and informative.....Thanks........Ira
By the way, I'n, curious about the type of software company that you are involved in. Hopefully you may wish to share this information with us.............Thanks again
By the way, I'n, curious about the type of software company that you are involved in. Hopefully you may wish to share this information with us.............Thanks again
#5
Posted 30 May 2006 - 12:14 PM
Since you asked, my company is Still River Retirement Planning Software, Inc. (www.stillriverretire.com). Our primary specialty USED TO be 403(b) compliance, but with the passage of EGTRRA in 2001, demand for such software plummeted. We do still serve that marketplace, but our new specialty is financial planning for retirees and near-retirees. Our software is designed for use mainly by financial professionals, and we do not sell it in the retail market. But we do have some web-based calculators on our website, and we also allow people to downloand demo (but still useable) versions of most of our desktop software -- at no charge (but also no warranty!!).
--Chuck Yanikoski (President)
--Chuck Yanikoski (President)
#6
Posted 30 May 2006 - 09:33 PM
Thank you.....your company serves a real need......my best wishes for success............Ira
#7
Posted 02 June 2006 - 07:26 PM
Tony, I set up a Roth, on my own, while I was having deductions taken out for my 403b..two separate
"pots" of money..Depending on age, goals, time to retirement, etc. the fund you select might be a targeted date when you will retire, such as 2035, or 2045, whatever, with T.R. Price or another company...the district or employer does not necessarily have to be involved..You might even get an automatic deduction from your savings/checking account on a monthly basis to go into the fund..Since your paying taxes anyway, at the front of the transaction, you don't have to think of it as being part of a "sheltered" investment, i.e., you don't need brokers/administrators, or any middle men to do this...
While I think this sounds nice it is still very important to know that the money has to stay there..and you need to know the rules about taking it out, lest you want to use it for a down payment and then find out the penalties are horrendous (e.g., putting you into a higher tax bracket, 10% penalty...stuff like that)..Nevertheless..I am pleased as punch that I set mine up..I have a lot of money there now...which will be tax-free when I take it out...Best of Fortunes, Dan
"pots" of money..Depending on age, goals, time to retirement, etc. the fund you select might be a targeted date when you will retire, such as 2035, or 2045, whatever, with T.R. Price or another company...the district or employer does not necessarily have to be involved..You might even get an automatic deduction from your savings/checking account on a monthly basis to go into the fund..Since your paying taxes anyway, at the front of the transaction, you don't have to think of it as being part of a "sheltered" investment, i.e., you don't need brokers/administrators, or any middle men to do this...
While I think this sounds nice it is still very important to know that the money has to stay there..and you need to know the rules about taking it out, lest you want to use it for a down payment and then find out the penalties are horrendous (e.g., putting you into a higher tax bracket, 10% penalty...stuff like that)..Nevertheless..I am pleased as punch that I set mine up..I have a lot of money there now...which will be tax-free when I take it out...Best of Fortunes, Dan
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