Are 401(k) & 403(b) Roth contributions right for you?

Posted: 10/16/06

Are 401(k) & 403(b) Roth
contributions right for you?

By Sherre Stepehens

Starting this year, your employer may add a 401(k) or 403(b) Roth contribution to its retirement plan, but is this option right for you? It depends. Consider the following key points.

Eligibility. Roth IRAs are not available to higher income taxpayers; however, income limitations do not apply to 401(k) or 403(b) Roth contributions. If you are eligible to make elective deferrals, you are eligible to make Roth contributions.

Taxes. Which is more valuable to you, paying taxes now or later? If you are in a very low tax bracket now and expect to be in a higher tax bracket in the future, or you have many years ahead to contribute and accumulate earnings, a 401(k) or 403(b) Roth contribution may be beneficial. Decades of compounding earnings can result in significant accumulations and tax-free distributions can provide more purchasing power during retirement years.

Contribution limits. The contribution limits for 401(k) or 403(b) Roth contributions are substantially higher than Roth IRA limits. For 2006, the Roth IRA limit is $4,000 ($5,000 if age 50 or older). The 401(k) or 403(b) Roth contribution limit is the same as for elective deferrals (for 2006, $15,000 or $20,000 if age 50 or older). The $15,000/$20,000 limit applies to the sum of all elective deferrals and 401(k) or 403(b) Roth contributions.

Rollovers. You can roll a 401(k) or 403(b) Roth account balance to a Roth IRA, but distributions from a Roth IRA cannot be rolled into your retirement plan. Recently, the IRS issued proposed regulations that would allow you to roll over a 401(k) Roth account balance to another qualified plan. Only a direct rollover is available if you want to move 100% of the 401(k) Roth account balance. If you prefer to consolidate retirement assets with one provider, keep in mind the current limitation and watch for finalization of the proposed rollover regulations.

Impact on Social Security benefits. Tax-free distributions from your 401(k) or 403(b) Roth account do not impact the taxability of Social Security benefits.

Still uncertain? Perhaps a blend of elective deferrals and 401(k) or 403(b) Roth contributions would be a practical approach. Talk with your tax or financial advisor about what’s right for you.

Last, be aware that 401(k) or 403(b) Roth contributions are scheduled to go away at the end of 2010 unless Congress takes action to extend the time limit or make them permanent.

Sherre Stephens is a certified employee benefits specialist and director of executive and institutional benefit design for GuideStone Financial Resources of the Southern Baptist Convention.