The savings options now allow participants to designate their b contributions as before-tax or Roth. Whether you are a new enrollee in the b or a current participant, you will want to consider designating some or all of your contribution to this after-tax savings opportunity. This is different from b contributions that are made on a before-tax basis.
Before-tax contributions reduce your taxable income and defer taxes until you withdraw the money. One of the greatest benefits of Roth savings is the ability to reduce your tax liability in retirement. For decades, the assumption has been that most people would be in a lower tax bracket in retirement and thus would benefit from before-tax savings.
However, changes in tax policy, including lower tax rates, the taxation of Social Security, and other deductions available under the tax code, increase the chances that you could be in the same or higher tax bracket when you retire. These changes mean that before-tax savings alone may not be the optimal tax strategy in every situation.
In retirement, Wisconsin public school employees typically have at least three sources of income: the Wisconsin Retirement System, Social Security, and individual retirement savings. All are taxable as ordinary income in retirement.
Any tax savings realized today could be more than offset by a higher tax bill in retirement. The Roth b provides an opportunity to receive tax-free retirement income. However, districts are not required to offer the Roth b feature in their plan, so check with your employer to see if they offer this feature. Current participants whose employer offers the Roth b need to complete a new Salary Reduction Agreement SRA and choose investment allocations for their Roth contributions.
If you do not have a b account with Member Benefits, you will need to complete an enrollment application as well. The Roth IRA is another after-tax savings option. If you are maximizing your b contributions, or you are concerned about the ability to access your contributions before retirement, you may want to contribute to the Roth IRA.
On the other hand, a b has much higher contribution limits, which allows you to build your retirement savings faster if you can afford to contribute more than the IRA cap.
Investing is also probably easier with a b as well since all you need to do is sign up: Your contributions are automatically withheld from your pay and direct deposited into the investments you have chosen.
While you do have to set up an IRA with a custodian, once your account is established you can arrange to have money from your paycheck or checking account transferred directly into your IRA on a regular basis.
Ideally, eligible participants would contribute the maximum allowable to both a b and a Roth IRA. If you are dissatified with your options in the b plan offered through your school district or only have a limited amount to contribute to a retirement plan, you may want to consider funding a Roth IRA before funding a b.
Let's compare these two plans. Employees of public schools and certain tax-exempt organizations — as determined by Section c 3 of the Internal Revenue Code. Contributions are pre-tax and come directly out of your paycheck. Meaning, in the eyes of the government you've actually earned less your b contribution is deducted from your earnings so you are taxed less.
No pre-tax advantages, however, withdrawals of contributions are never taxed and are always available for withdrawal. If you qualify for both a Roth IRA and a b , know which you should choose can be difficult. But if you have limited funds and can only contribute money to one account, then your choice depends on a few factors. The first thing to consider is employer matching. Beyond that, consider taxes: Do you expect your tax rate to be higher now or in retirement?
If your tax rate is relatively low right now, you may be better off with a Roth. Contributing early in life is also advantageous because your contributions have more time to grow tax-free. If, on the other hand, you expect to have a lower tax rate in retirement than you do now, then you may be better off with a tax-deferred vehicle like a b.
Another factor to keep in mind is your investment options. On the other hand, opening an individual retirement account at a brokerage gives you access to a wide variety of options, from sector ETFs to low-cost index funds to individual stocks and bonds. A final note: Just as Roth IRAs also come in a traditional tax-deferred variety, so too can a b come in a Roth variety. So if you like the simplicity and high contribution limit of a b , but want to pay taxes now and enjoy tax-free distributions in retirement, look into a Roth b.
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