Contribute to a 403(b) retirement plan or Roth IRA?


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Dear Liz,
I am married, just turned 71 and am still employed. My company recently decided to switch our 401(k) plan to a 403(b) plan. While meeting with the company’s financial person, he advised that I should consider switching to a Roth IRA. Would you advise on the implications of following this advice, or should I consider other options? What is best for me?
— Elizabeth

Dear Elizabeth,
It’s not clear if this “financial person” wants you to begin contributing to a Roth or if the suggestion is to convert your 403(b) account to a Roth. Your employer plan may allow participants to roll over 403(b) money into IRAs while they’re still working. If that’s the case, you would have to include the value of the 403(b) in your income and pay taxes on the conversion.

Even if you can do that, it’s questionable whether you should. Late-in-life Roth conversions are tricky, because you essentially would be accelerating a tax bill that otherwise would be paid over many years in the future. You would be betting that your future tax savings from the Roth will outweigh the immediate tax bill. (Roth withdrawals in retirement are tax-free, and there are no minimum distribution requirements, so unneeded money can be passed along to heirs.)

Should you convert to a Roth IRA? © Bigstock

For young people who are likely to be in higher tax brackets in the future, the trade-off can make sense. For most older people, though, it often doesn’t because their tax bracket is likely to decline once they retire.

That leaves the other option, which is contributing to a Roth instead of your workplace plan. That would clearly be a bad idea if you’d be missing out on a company match. Otherwise, the details of your financial situation would determine whether it’s better to pay taxes now with nondeductible contributions to a Roth or pay them later by making tax-deductible contributions to a workplace plan.

Rather than rely on a “financial person” with unclear credentials and motivations, consider hiring a fee-only financial planner to review your entire financial situation, including your future retirement plans. This person can give you objective advice about your best moves.

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