Roth Options

Traditional contributions to a retirement savings plan are tax-deferred, meaning they are not subject to income tax when deducted from your paycheck, but they are taxed when you take a distribution at a later time.  

As another option, you may make after-tax Roth contributions to the 403(b) SRA and 457(b) Deferred Compensation Plan.  When you contribute after-tax dollars to these plans, qualified distributions you take at a later time are tax-free.  However, the entire contribution amount is included in your gross income so there is no tax savings during the year it is deducted from your paycheck. 

The after-tax Roth option does not increase the annual contribution limits for the 403(b) SRA and 457(b) plans.  It just means that you may designate some or all of your contributions to these plans as after-tax Roth.

No Income Limits on U-M Roth Plans

Unlike a Roth IRA, there are no income restrictions on the U-M Roth retirement savings plan options.  These options may be of particular interest to individuals whose income is above the limit to qualify for a Roth IRA through a bank or financial institution.

Roth Highlights

  • You may make your 403(b) SRA and 457(b) contributions as tax-deferred, after-tax Roth, or any combination of both.
  • If you already make tax-deferred contributions to a U-M 403(b) SRA or 457(b) account, you are not issued a new account with TIAA-CREF or Fidelity if you decide to make after-tax Roth contributions.  Any Roth contributions you make go into your existing account and are tracked separately from your tax-deferred amounts.      
  • An after-tax Roth contribution will reduce your take-home pay more than if you made an equivalent tax-deferred contribution to the 403(b) SRA and 457(b) because the Roth contribution is subject to income tax.
  • Roth qualified distributions are tax-free when made after a 5-taxable-year period of participation and is either made on or after the date you attain age 59½, made after your death, or attributable to your being disabled.  
  • After-tax Roth accumulations are still subject to the same eligibility criteria to elect a distribution, rollover or loan as tax-deferred contributions.  Compare after-tax Roth and tax-deferred contributions.
  • You may postpone distributions from the Roth 403(b) SRA and Roth 457(b) indefinitely during your lifetime (requires rollover to a Roth IRA) and even pass assets tax-free to heirs.
  • Once you make an election to make a contribution as after-tax Roth is irrevocable.  You may change future contributions to be tax-deferred but once the election has been made to designate a contribution as after-tax Roth you cannot change it to tax-deferred retroactively.

After-Tax Roth vs. Tax-Deferred

  • If your tax rate in retirement will stay the same as it is now, both tax-deferred and after-tax Roth products yield about the same benefit.
  • If your tax rate in retirement will be higher than it is now, after-tax Roth products yield a higher benefit.
  • If your tax rate in retirement will be lower than it is now, tax-deferred products yield a higher benefit.
  • View a comparison chart of tax-deferred vs. after- tax Roth retirement savings options.

You might want to make after-tax Roth contributions if you:

  • Expect to be in a higher tax bracket in retirement.
  • Want qualified tax-free distributions in retirement.
  • Want the option to postpone required minimum distributions at age 70½ (requires rollover 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 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 amount.  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.

You might want to make tax-deferred contributions if you:

  • Expect to be in a lower tax bracket in retirement.
  • Want to lower your current taxes.
  • Don’t want to pay taxes now with Roth contributions. 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).