If you work in the education industry, chances are your employer offers a retirement savings plan, such as a 403(b) plan. These plans are a popular way for employees to prepare for the future, especially if your employer offers employer-sponsored contributions. There are two main types of 403(b) contributions: traditional (pre-tax) and Roth (post-tax). It’s important to understand the key differences and how each impacts your finances.
How 403(b) Plans Work
A 403(b) plan is a type of retirement savings plan that’s like a 401(k) plan, but specifically designed for employees of certain public schools, nonprofit organizations, and other tax-exempt institutions. Unlike some other retirement accounts, you can’t open a 403(b) plan on your own, it must be offered through your employer. You can contribute a portion of your salary to the plan directly from your paycheck. Depending on the plan, these contributions can be made either before or after taxes have been withheld.
Understanding Pre-Tax (Traditional) and Post-Tax (Roth) Contributions
Traditional Pre-Tax 403(b) Contributions
Traditional 403(b) contributions are made before taxes are deducted from your paycheck. This reduces your taxable income, which can result in immediate tax savings. You potentially save more money upfront, but you’ll need to pay taxes on both the contributions and any investment earnings when you withdraw funds in retirement.
Post-Tax Roth 403(b) Contributions
Post-tax Roth 403(b) contributions are made after taxes are taken out of your paycheck. While this won’t lower your current taxable income, the advantage is tax-free qualified withdrawals in retirement (including investment earnings). This can be especially beneficial if you anticipate being in a higher tax bracket later in life.
Diversifying Your Retirement Savings
When planning for retirement relying on a single type of savings plan might not always be the best strategy. Combining both traditional and post-tax Roth 403(b) contributions can provide tax diversification, flexibility, and greater financial security for your future. When you understand how these contributions complement each other, you can work towards optimizing your retirement savings, so you’re better prepared. Remember that tax laws and rates can change over time, and your financial situation may evolve as you approach retirement. Making both types of contributions may help you:
- Minimize Tax Risk: Diversification ensures that part of your retirement savings is taxed now (Roth) and part is deferred until later (traditional). This can provide flexibility if future tax rates are higher or lower than expected.
- Optimize Withdrawals: Having both pre-tax and post-tax savings allows you to strategically withdraw funds during retirement to manage your tax liability. During retirement, you can withdraw from your Roth account tax-free, giving you flexibility if you want to avoid triggering additional taxable income. Withdrawals from your traditional account might be beneficial if you’re in a lower tax bracket at that time. The types of qualified withdrawals remain the same.
- Preserve Savings: While traditional 403(b) contributions have required minimum distributions (RMDs) starting at age 73, Roth 403(b) contributions are not subject to the RMD rule as long as the owner is alive. This can help you preserve your savings for later years or pass them on to beneficiaries if certain conditions are met.
Contributing to Both Types of Accounts
The Internal Revenue Service (IRS) allows you to make contributions on both a traditional and post-tax Roth 403(b) basis. If you do, you may split your contributions between both types of accounts as long as you do not exceed the maximum annual limit. How you choose to divide your contributions between the two accounts often depends on where you are in your career and your expected tax situation. Consider these factors to help you create a smart and effective retirement strategy:
Early Career: Your income and tax rate are typically lower during this time. This makes post-tax Roth contributions more appealing since they’re made with post-tax dollars, allowing your savings to grow tax-free. Qualified withdrawals in retirement will also be tax-free, which can be beneficial if tax rates are higher in the future. Beginning your retirement savings early [BG1] allows your money to compound over time, building wealth steadily. You can save a smaller percentage of your income now and still reach your long-term goals due to the power of compounding.
Later Career: As you progress in your career, it’s common for your income to peak. This is when traditional contributions may seem like a better choice since they’re made with pre-tax dollars, reducing your taxable income and potentially keeping you in a lower tax bracket. This can be especially helpful during high-earning years. Also, if you’re over age 50, the IRS allows you to make “catch-up” contributions, enabling you to save more and boost your retirement nest egg.
Throughout Your Career: If your income or financial needs fluctuate during your career, you may adjust how much you contribute on a pre-tax or Roth basis to help maintain a balanced approach.
Your Retirement Savings Strategy
The decision between pre-tax and post-tax Roth contributions isn’t one-size-fits-all. It depends on your career stage, income level, and expected future tax situation. Using both traditional and post-tax Roth 403(b) plans allows you to diversify your tax exposure and gain flexibility in retirement. This balanced approach can help you be better equipped to manage taxes and optimize your retirement savings. Regardless of which type of plan you choose, starting early helps maximize growth potential, while later-career strategies focus on catching up and minimizing taxes. For the best results, consult a financial advisor to tailor a plan that aligns with your unique circumstances and retirement goals.
This blog is up to date as of October 2025 and has not been updated for changes in the law, administration or current events.
