403B vs. Roth 403B

Both a traditional 403(b) plan and a Roth 403(b) plan offer tax-advantaged ways to save for retirement. Only certain types of employers can offer 403(b) plans, including public schools and tax-exempt organizations, such as charities. Also known as tax-sheltered annuities, or TSA plans, all types of 403(b) plans offer tax benefits. However, the Roth 403(b) plan is structured differently, from a tax perspective, than a traditional 403(b).


Employees can contribute to both types of 403(b) plans on an elective deferral basis, in which employers divert part of your paycheck directly into the plan. For 2015, the maximum amount you could put into any type of 403(b) plan is the lesser of $18,000 or the amount of your compensation. With a traditional 403(b) plan, your contributions are made with pre-tax dollars, meaning the amount you contribute does not need to be reported as income when you file your taxes. With a Roth 403(b) plan, you contributions are made with after-tax dollars. This means there is no immediate tax benefit when you make a contribution to your Roth 403(b).

Earnings and Capital Gains

Perhaps the greatest advantage of all types of 403(b) plans is that you don't have to worry about taxes while your money is still in the account. In regular investment accounts, you have to report any dividends, interest or capital gains annually when you file your taxes. With both traditional and Roth 403(b) plans, no such reporting is required, and no taxes are due at the time the earnings are generated. Since you don't have to use any of your earnings to pay for taxes, they can remain within your 403(b) plan and compound.

Taxation of Distributions

Distributions from a traditional 403(b) plan are fully taxable as ordinary income. Since you never paid tax on either the money you put into the account or your earnings, all of your withdrawals come out as taxable income. The main advantage the Roth 403(b) plan has over the traditional version is that both earnings and contributions can be withdrawn tax-free from a Roth. Even your earnings, which have never been subject to taxation, can be distributed without any tax consequences.

Penalties & Restrictions

As a 403(b) plan is intended for retirement savings, you can't generally take money out until you reach 59 1/2 or leave your job. Exceptions are made for death, disability or certain financial hardships. If you withdraw money without a qualifying exception, you'll owe a 10 percent early distribution penalty as well.

To receive a tax-free distribution from your Roth 403(b), your Roth distribution must be qualified. A qualified Roth distribution is one made at least five years after the first contribution. Additionally, the withdrawal must either come after you turn 59 1/2 or be the result of your death or disability. If your distribution is non-qualified, you'll owe taxes on the earnings portion of your withdrawal.