The Roth 403(b) After-Tax Retirement Savings Plan
As announced in June 2019 on Cardinal at Work, Stanford Benefits has expanded the Stanford Contributory Retirement Plan in 2020 to include Roth 403(b), a vehicle for saving and investing with after-tax contributions, which can help you create tax-free income in retirement.
While the Roth 403(b) may not be for everyone, it is another option for those who are interested in diversifying their tax treatment. For many investors, having a mix of before-tax and after-tax savings is an important part of their overall plan for retirement.
How to add Roth to your SCRP
Here are some resources if you are considering Roth.
- Download this narrated presentation with specific details about electing Roth, in-plan conversions, converting accumulated CRA after-tax accounts or TDA rollover after-tax contributions, and more.
- Read the FAQ and graphic below.
- For questions or to elect Roth, call Fidelity (888-793-8733).
How is the Roth 403(b) different from the after-tax contributions I’ve been making to the Contributory Retirement Account (CRA)?
Here are some differences between the CRA after-tax contributions and the Roth after-tax contributions.
- Earnings: The earnings in the CRA are tax-deferred, meaning you will pay taxes on them at distribution, whereas earnings in the Roth are tax-free at distribution.
- The maximum contribution amounts: Your Roth contributions are subject to the same IRS limit as your before-tax contributions – the 402(g) limit – which is $19,500 in 2020 (or $26,000 for age 50+ catchup). Although the CRA after-tax contributions are not subject to this limit, everything you contribute to all retirement plans, plus your employer contributions, are subject to the IRS Overall Contribution Limit, which is $57,000 in 2020 (or $63,000 for age 50+ catchup contribution).
- Matchable amounts: Roth 403(b) contributions are not matchable, meaning that in order to receive the university’s basic and matching contribution, you must continue to contribute at least 4% in the CRA either before tax or after tax.
So which after-tax savings account is better, CRA or Roth?
The better question is: How can you make the most of both?
CRA after-tax is part of the university’s match, and it is not subject to the IRS before-tax limit, only to the IRS overall contribution limit. But the CRA’s earnings are taxed at distribution.
Roth is not part of the university’s match and is restricted to the IRS before-tax limit.
So one strategy is to save CRA after-tax dollars and then convert them to Roth dollars before they have the chance to grow. This is the big benefit to having both: the Roth in-plan conversion.
Who is eligible for the Roth 403(b)?
Stanford is making the Roth 403(b) broadly available; it does not have the income restrictions you would find with a traditional Roth IRA, and like the Tax-Deferred Account, the Roth 403(b) will be available to everyone after their first paycheck, including:
- Benefits-eligible faculty and staff (regardless of years of service)
- Temporary and casual workers
- Postdoctoral scholars
What is the Stanford Contributory Retirement Plan (SCRP)?
The SCRP is designed so that everyone—from basic savers to savvy investors—has access to an investment strategy that works for them.
In the SCRP, you are immediately vested, meaning your entire account balance is yours from the very beginning.
You can save for retirement by contributing before-tax or after-tax dollars.
Benefits-eligible employees also receive generous basic and matching contributions from the university after a year of service.
Learn more on the SCRP pages of Cardinal at Work.
What is a Roth in-plan conversion?
The Roth in-plan conversion means you can convert your after-tax contributions from CRA to Roth and future earnings will not be subject to tax on distribution.
- If you don’t already have CRA after-tax contributions: You can setup Fidelity’s automatic Roth in-plan conversion feature for future CRA after-tax contributions. Because the conversion is automatic, the CRA after-tax dollars generate little (or no) taxable earnings before being converted to Roth, so your taxes are minimal, if any. The ability to convert your CRA after-tax contributions to Roth means you can continue to maximize after-tax contributions without being bound by the 402(g) limit, plus you can avoid all or most taxes on earnings.
- If you already have CRA after-tax contributions: You also can take advantage of the automatic conversion, but first, you must convert your accumulated CRA after-tax contributions into Roth and pay the tax on earnings to-date. Depending on the balance of your accumulated CRA after-tax contributions, the tax can be substantial when converting the entire amount, so you can choose to convert your accumulated CRA after-tax contributions over time. Once your accumulated CRA after-tax dollars are converted to Roth, you can set up the automatic conversion, which will mean that future CRA after-tax contributions will generate little (or no) taxable earnings before being converted to Roth.
Can I convert rollover funds or pre-tax contributions into the Roth or is the in-plan conversion only for after-tax dollars?
You cannot convert rollover funds or pre-tax contributions, only after-tax dollars in your CRA can be part of the in-plan conversion. Also, you can only take advantage of the automatic conversion for future CRA after-tax contributions after you converted your accumulated CRA after-tax dollars.
How does the Roth 403(b) work?
In short, you contribute after-tax dollars and your earnings grow tax-free.
There are limits to how much you can contribute to your Roth each year; the Roth, combined with all of your before-tax contributions, cannot be more than the annual IRS 402(g) limit, which is $19,500 in 2020 (or $26,000 for age 50+ catchup contribution).
At distribution, you won’t have to pay taxes on your contributions or your earnings. However, the Roth requires “qualified distributions,” meaning that in order to request a distribution, you must wait until five years after your first contribution AND you are at least age 59 ½ or disabled (or, in the event of your death, your beneficiaries can request a distribution).
How are my Roth contributions invested?
The four investment options of the SCRP are designed to meet investors’ diverse needs:
- age-appropriate target retirement funds
- passively managed core funds
- TIAA traditional annuity
- self-directed brokerage account
Note that your new Roth account does not have to be invested in the same way as your other SCRP accounts. Learn more about investment features on the SCRP pages on Cardinal at Work.
How do I enroll into the Roth 403(b) and make or change elections?
Starting Jan. 2, 2020, you’ll be able to elect and manage Roth contributions through the same My Retirement Savings portal from which you access your other Stanford retirement accounts. Note that for most transactions initially, such as converting any accumulated after-tax contributions or setting up Fidelity's Roth in-plan conversion, you must call Fidelity at 888-793-8733.