20 Feb Should I pare back 403(b) saving in favor of Roth IRA?

Q. I’m 53 and I’ve been contributing 20% of my paycheck to my 403(b) at work, but I haven’t been saving in my Roth IRA. I have about $60,000 in my 403(b) and about $11,000 in my Roth IRA. Should I be contributing less to my 403(b) and more to my Roth IRA? I’m not sure how to allocate my contributions.
— Saver

A. First of all, congratulations! You should be commended for saving 20% of your paycheck for retirement.

If everyone took this approach early on in their investing careers, we would not have the retirement crisis that unfortunately exists for many people.

You asked whether you should be contributing less to your 403(b) and more to your Roth IRA.

It sounds like you’re contributing enough to qualify for any available employer match. If you were to pare back contributions, you want to at least be sure you’re taking advantage of the match, which is essentially free money, said Timothy Brunnock, a financial advisor and attorney with Trinity Financial Strategies in Morristown.

As to whether you should contribute more to your Roth IRA, Brunnock said there are both income and taxation issues to consider.

He said for 2020, you can make a Roth IRA contribution of $6,000, plus an additional $1,000 if you are age 50 or older. Single filers must have a modified adjusted gross income (MAGI) of $139,000 or less. Contributions begin to be phased out starting with a MAGI of $124,000. Married couples must have MAGI of less than $206,000 to be eligible to contribute to a Roth, and contributions are phased out starting at $196,000.

The key difference between contributing to a Roth versus other tax-deferred plans such as 403(b)s is the timing of how they are each taxed, Brunnock said.

“With traditional retirement accounts such as 403(b)s, you can deduct your contributions on your taxes for that taxable year,” he said.

Then when you take out the money, you will pay taxes at your regular taxable rate. You can begin taking distributions without penalty as early as age 59 1/2. At age 72, you must begin taking Required Minimum Distributions (RMDs), he said.

With Roth IRAs, you are not able to take a deduction in the year in which you make the contribution, Brunnock said. In other words, you are using after-tax money to fund a Roth. However, the key benefit is that when you ultimately take those distributions, they are taken tax-free and there are no RMDs.

“A client of mine who owns a farm in Sussex County summed it up this way: `I’d much rather pay tax on the seed than pay tax on the entire harvest,’” he said. “Pretty sound advice.”

Many investors choose to fund both kinds of accounts so you have a more tax-diverse portfolio.

With respect to how to allocate your contributions in both the Roth and the 403(b), employer-sponsored plans usually offer fairly limited investment options, but an IRA will generally offer you access to a much larger, more robust choice of investments, Brunnock said.

Generally speaking, he said, the further away your retirement is, the more aggressive you can be with your investment decisions.

“A 35-year-old who would like to retire at age 65 has at least a 30-year time horizon,” Brunnock said. “He or she could conceivably withstand the ups and downs of normal market volatility — and perhaps even a recession or two — and look to maximize their returns over a long time horizon.”

But someone who would like to retire within five years may be inclined to invest more conservatively.

You should take some risk tolerance tests online and review your goals and time horizon. Then, consider meeting with a financial advisor who can make recommendations based on your individual needs.

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This story was originally published on Feb. 20, 2020.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.