Introducing the Roth 403(b) Plans for Non-profits

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Tax-exempt organizations and public schools can now offer a Roth 403(b) option to their employees, thanks to tax rules that became effective in January 2006.

Tax-exempt organizations and public schools can now offer a Roth 403(b) option to their employees, thanks to tax rules that became effective in January 2006, announces Lamaute Capital, Inc. (InvestSafe.com).

With a Roth 403(b) plan employees have the opportunity to defer some of their wages on an after-tax basis. The major advantage of the Roth 403(b) is that any earnings in the Roth 403(b) account can grow tax-free and remain tax-free at time of withdrawal provided that certain qualifications are met.

The Roth 403(b) is more generous and flexible than the Roth IRA. For 2006, the Roth 403(b) salary deferral limit is $15,000 vs. $4,000 for the Roth IRA. The “catch up” contribution for those 50 and older is $5,000 vs. $1,000 for the Roth IRA. Loans are possible in a Roth 403(b) account, but not in a Roth IRA. And, unlike the Roth IRA, employees at all income levels are eligible for the Roth 403(b), provided the employer offers this feature in the plan.

Participants may split their contributions in any proportion between a traditional 403(b) account and Roth 403(b) account. However, the aggregate contributions may not exceed the elective deferral limit mentioned earlier. Contributions once made to the Roth 403(b) account cannot be re-characterized as pre-tax savings.

Because earnings generated in a Roth are generally not subject to income tax at distribution, the Roth 403(b) would make more sense for:

  •     Those who think that their tax rate may be higher when they are ready to retire.
  •     Long term investors that have the potential to accumulate considerable compounded earnings in their account over time and want that growth to stay tax-free.
  •     Those concerned with passing some their retirement funds tax-free to their heirs.
  •     Executives whose income level disqualifies them for the Roth IRA.

The Roth 403(b) is one more tool for participants to tailor their investments to meet their individual retirement objectives. Employees should consult with their tax advisors to assess their individual Roth savings opportunity.

Lamaute Capital, (http://www.InvestSafe.com) is an investment brokerage firm that specializes in retirement plans for small businesses and nonprofit organizations.

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