Under normal circumstances, tax season would be behind us, and we’d be looking ahead to the summer months. Of course, things are anything but normal. This year, tax season has been extended all the way into mid-summer. But even though the IRS deadline has been moved to July 15, taxes are always an important consideration in relation to your Christian and Missionary Alliance (C&MA) Retirement Plan.
Your plan offers flexibility with two different ways for you to save — traditional 403(b) contributions and Roth 403(b) contributions. The main difference between the two is how taxes are handled.
Traditional 403(b) contributions are made on a before-tax basis, and you pay taxes only when you take a distribution. Roth 403(b) contributions are made with after-tax dollars, and withdrawals are tax-free as long as you’ve reached age 59½, suffered a disability or died (in which case your beneficiary would receive the withdrawal) and as long as it has been at least five years since you began making contributions to your account.
Each contribution type has its advantages and gives you flexibility related to how you choose to save. It’s important to learn more to decide if making traditional, Roth or a combination of both types of contributions is the right option to best help you reach your savings goals.
Traditional 403(b) withdrawals – Earnings taken from your traditional 403(b) account are subject to income taxes. If the withdrawal is made prior to you reading age 59½, a 10% penalty tax may be due on the amount of the withdrawal in addition to ordinary income tax.
Roth 403(b) withdrawals – It’s important to know what happens if you take money out of your Roth 403(b) account before you have reached age 59½, suffered a disability or died (in which case your beneficiary would receive the withdrawal) and before at least five years have passed since you began making contributions to your account. You would generally pay income taxes plus a 10% penalty tax on any earnings that are distributed.
Employer discretionary matching contributions
Just like with your traditional contributions, you are eligible to receive matching contributions from C&MA on your Roth 403(b) contributions. But keep in mind that any discretionary matching contributions you may receive are made to your traditional 403(b) account on a before-tax basis and will be subject to taxes when you take a withdrawal.
How your Roth 403(b) contribution limits differ from a Roth IRA
Your Roth 403(b) contribution limits are the same as traditional 403(b) contribution limits. The IRS limit for 2020 is $19,500 ($26,000 if you are age 50 or older, with the opportunity to save up to an extra $6,500 through catch-up contributions). In addition, your Roth 403(b) account doesn’t have any income phase-out provisions.
Roth IRA contributions are limited to $6,000 in 2020 ($7,000 if you are age 50 or older). Depending on your income, the amount could be less. For individual tax filers, income phase-out rules apply if earnings range from $124,000 to $139,000. For married couples filing jointly, the income phase-out range is $196,000 to $206,000.
Leaving money in a Roth 403(b) account
Once you reach age 70½ — or 72 effective January 1, 2020 — you are generally required to begin taking minimum distributions from either a Roth 403(b) or a traditional 403(b) account. If you are still employed with the employer who sponsors your plan or own less than 5% of the business sponsoring the plan, you might not be required to take a minimum distribution. Refer to your plan provisions for more information.
Roth Conversion
Another option available to you is an In-Plan Roth Conversion of your existing non-Roth account to a designated Roth account within the plan. Prior to requesting an In-Plan Roth Conversion of your current 403(b) pre-tax account to a Roth after-tax account, consider all your options and their features and fees before moving money between accounts.
To obtain an In-Plan Roth Conversion package that contains the appropriate form and additional information, please call Empower Retirement at 866-467-7756.
Note: Once the request for an In-Plan Roth Conversion is processed, the transaction cannot be reversed.
Making the best choice for you
When it comes to making traditional 403(b) contributions, Roth 403(b) contributions or both, the choice is yours. And your decision depends on your personal situation. The Roth 403(b) option essentially locks in today’s tax rates on your contributions. If you expect to be in a higher tax bracket when you retire, the Roth 403(b) option may make sense for you, because your contributions will presumably be taxed at a lower rate now compared to when you retire.
If you expect to be in a lower tax bracket when you retire, you might want to consider the traditional 403(b) option. You won’t pay taxes on your contributions or any potential earnings until you take a distribution, which is usually at retirement when your income and tax obligations may be lower than today.
The bottom line: Participate!
While choosing which type of contributions you want to make matters, the most important thing to do is save as much as you can today for your retirement. If you are not currently enrolled in your plan, you can elect to make traditional 403(b) contributions, Roth 403(b) contributions or both by completing your plan’s Enrollment form.
If your employer is not yet participating in the Alliance 403(b) plan, please contact Alliance Benefits for further clarification on how you can join.
Once you’ve done your research and consulted the experts, you decide on the contribution strategy that’s best for you. And remember, you can always make changes along the way based on your needs and goals by completing a Paycheck Contribution Election Form. Please give this form to your employer so they can send this — along with their updated Monthly Contribution Report — to Alliance Benefits reflecting your changes.
As always, you’re welcome to contact Alliance Benefits at [email protected] regarding this process or for any other questions you may have.
Who Is Empower Retirement?
Empower Retirement is a premier retirement services provider that’s transforming the way people approach retirement planning. Serving Alliance 403(b) Retirement Plan participants, they make retirement planning more personalized, more accessible and easier to understand. In whole, they help over 9.6 million people with a vision grounded in a simple, singular mission: to help people save enough today and work toward a secure future.
Securities offered and/or distributed by GWFS Equities, Inc., Member FINRA/SIPC. GWFS is an affiliate of Empower Retirement, LLC; Great-West Funds, Inc.; and registered investment adviser, Advised Assets Group, LLC. Investing involves risk, including possible loss of principal. This material is for informational purposes only and is not intended to provide investment, legal or tax recommendations or advice.
The tax information provided is based on current laws, which are subject to change and interpretation.
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