Educators: Are you missing the Roth 403(b) opportunity?
Back in the late 50's when 403(b) plans were created, tax rates were outrageously high. The marginal tax rate was in the 50% range with the top tax rates reaching the 90% range! Back then it made sense that school employees would defer paying taxes at such a high rate, and upon retirement, when their tax rates fell, they could start taking withdrawals from these plans and benefit from the tax deferred growth. Things have changed, dramatically, since then. Today's school employees are in the exact opposite situation. Current tax rates are now among the lowest in history. Which means school employees, especially new and younger employees, could be deferring income at a lower rate only to pay more at a higher tax rate on their 403b plans at retirement.
Why do we believe tax rates are going up? A combination of things. The United States printed $13 trillion dollars in response to covid.1 This has obviously caused inflation to spike, which creates an increase in interest rates... everything is becoming more expensive. Even more telling is that nearly half of baby boomers, 10,000 of which turn 65 every day, have zero retirement savings!2 What are your options if you are 65, retired and have no savings? You vote for social services to take care of you. Who is going to pay for all those services? Future generations through increased taxation.
Most school employees are sitting on a mountain of tax deferred assets; Your pension is taxable, traditional 403(b)s and IRAs are taxable, 401(k)s from old jobs you had are taxable. Just when you get to your golden years and can enjoy the pension and savings you worked so hard for, the taxman is going to ask for a bigger and bigger piece of your benefits and savings.
What can school employees do to help minimize their tax obligations at retirement? Take a serious look at the Roth 403(b). A Roth 403(b) works differently than a traditional 403(b). Your contributions to a Roth 403(b) are taxed at today's tax rates. By forgoing the tax break now, you earn the right to withdraw money from your Roth 403(b) tax-free in retirement. The Roth 403(b) does not have the same income and contribution limitations that exist on Roth IRA's, making it a potentially suitable choice for most school employees.
Would you like more information about the Roth 403(b)? Give us a call at (310) 541-2567, or click here to find time on our calendar We will be happy to guide you to the programs we feel are best suited for your individual goals.
Sources:
- https://www.nasdaq.com/articles/money-printing-and-inflation%3A-covid-cryptocurrencies-and-more
- https://thehill.com/business/personal-finance/3991136-nearly-half-of-baby-boomers-have-no-retirement-savings/
A distribution from a Roth 403(b) is tax-free and penalty free provided that the five-year aging requirement has been satisfied and one of the following conditions is met: age 59 1/2, Death, Disability.