Benefits Plans - roth savings Plans

If your tax rate in retirement:

Which is better: tax-deferred or after-tax?

Stays the same as it is now

Both yield about the same benefit

Is higher than your current tax rate

After-tax Roth yields a higher benefit

Is lower than your current tax rate

Tax-deferred products yield a higher benefit

Topic

Tax-deferred

After-tax Roth

Contributions when deducted from your paycheck

Not subject to income tax; can reduce your current taxable income.

Subject to income tax; will not reduce your current taxable income.

Distribution of Contributions

Taxable

Tax-free

Distribution of Earnings

Taxable

Tax-free if qualified

Subject to income tax to beneficiaries in the event of death?

Yes

Tax-free if the deceased started making Roth contributions more than 5 tax years prior to distribution.

Estate tax

May apply

May apply

Subject to required minimum distributions at age 70½?

Yes

Yes.  However, if the Roth balance is rolled over to a Roth IRA before the calendar year in which you reach age 70½ you can delay distributions indefinitely during your lifetime.

Subject to IRS 10% penalty for distributions prior to age 59½?

403(b) SRA: Yes
457(b): No

403(b) SRA

• After-tax contributions: no
• Earnings: yes unless an exception applies

457(b):

• After-tax contributions: no
• Earnings: no

Rollovers

To another tax-deferred 403(b), 457(b), 401(k), 401(a), Traditional IRA  and Roth IRA.

To another after-tax Roth 457(b), Roth 403(b), Roth 401(k), Roth 401(a) or Roth IRA.

Why you might want one

• Expect to be in a lower tax bracket in retirement.
• Want to lower your current taxes.
• Don’t want to pay taxes now with the Roth: It can take several years of investment earnings to recoup the amount lost to pay taxes on Roth contributions when deducted from your paycheck.
• Are close to retirement, expect to start taking distributions and don’t have several years to wait for compounding of after-tax Roth contribution earnings to make up for the tax liability paid when Roth contributions are deducted from your paycheck.
• Don’t think you will meet the criteria for Roth distributions to be tax-free: For example: if the account won’t be open for at least 5 years and you won’t be at least age 59½ (or disabled or deceased) when a distribution is taken, then the earnings will not be tax-free.

• Expect to be in a higher tax bracket in retirement.
• Want qualified tax-free distributions in retirement.
• Want option to postpone required minimum distributions at age 70½ (requires roll over to a Roth IRA).
• Cannot have a Roth IRA due to IRS income restrictions.
• Want to pass on assets tax-free to heirs.
• Want to make after-tax Roth contribution in excess of Roth IRA limits.
• Have a long retirement horizon that will allow time to accumulate significant tax-free assets in the form of compounding on earnings which can be withdrawn tax-free.
• Want tax diversification of having both after-tax and tax-deferred assets as a hedge against potential tax increases.
• Want to contribute the maximum allowable: A qualified Roth distribution may provide more income in retirement than an equivalent distribution from a tax-deferred 403(b) or 457(b) since Roth earnings are tax-free instead of just tax-deferred.