403b plans are offered to people who work for certain non-profit organizations, such as public schools, to help them save money for retirement. Roth 403b plans are an after-tax retirement savings plan, which is similar to a traditional 403b except in the tax benefits. Roth 403b plans share the same investment options as traditional 403b plans, you can only invest them in annuities or mutual funds.
Roth 403b plans do not allow contributions to be made with pretax dollars, which means that the money you contribute to your 403b plan will be included in your taxable income for the year on your W-2 form. Once the money is in your account, it grows tax-free as long as the money remains in the account. When you take qualified withdrawals from the account, the money comes out tax-free. You must still report the withdrawals on your taxes, but it is not included in your taxable income.
The contribution limits for Roth 403b plans are cumulative with traditional 403b accounts, which means that the more money you contribute to a traditional 403b plan, the less money you can contribute to a Roth 403b plan. The annual contribution limits can change each year, depending on inflation. For 2010, the maximum contribution is $16,500. If you are 50 or older, the maximum contribution increases to $22,000. Roth 403b plans do permit employers to match employee contributions; matching contributions must be put into a traditional 403b plan.
You may take qualified withdrawals from your Roth 403b plan when you reach 59 1/2 years old, just like a traditional 403b plan. However, Roth 403b plans also require that you have had the account open for a period of 5 tax years from January 1 of the tax year you make the first contribution. If you take an early withdrawal from a Roth 403b plan, you must pay taxes and a 10 percent penalty on the portion of the withdrawal the comes from earnings on the contributions. For example, if 80 percent of your Roth 403b's value is from contributions, 80 percent of an early withdrawal would come out tax-free and penalty-free and 20 percent would be taxable and subject to the 10 percent early withdrawal penalty.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."