Roth vs Traditional 403(b) – Which One as a Resident?

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If you google this topic, you will run across many websites describing what the differences between Roth and Traditional 403(b) are, but what makes sense for you as a resident if you find that you have money left over to save for retirement? As with all the other posts, I want to share my opinion but ultimately the decision is up to you.

So what’s the difference between the two? The essential difference is that you either pay tax up front (Roth), or at the end (Traditional). In a Roth 403(b) you put in post-tax dollars, but then when you start withdrawing the money, you don’t pay taxes. In other words, there is no tax benefit right now with the Roth because you’re paying taxes on whatever you’re saving, but there’s tax benefit when you withdraw in the future. In a Traditional plan, you put in pre-tax dollars, but then when you start withdrawing the money, you have to pay taxes. So you end up saving some money in taxes now, but whatever you save will be subject to tax later on. In either plan, you end up paying taxes only once on your retirement savings.

Let me give you a simple illustration. Let’s say you make $100/yr and decide to save $10 in a Roth 403(b). You would end up paying income tax on the whole $100 at your current income tax level, but the $10 you save (and whatever that $10 grows to be) can be withdrawn later tax-free. On the other hand, if you were to put $10 in a Traditional 403 (b), you would only pay taxes on $90 right now, and the $10 pre-tax dollar (and whatever that $10 grows to be) will be taxed when you start withdrawing it.

So as you can see, the question boils down to comparing your current tax rate and the tax rate you will face when you start withdrawing money from the account. If you think your tax rate will be lower in retirement (as is the case with most people), it’s better to go with the traditional pre-tax contribution. That way, you will postpone paying taxes until retirement when you expect to be in a lower bracket. If you think your tax rate will be the same or higher in retirement, it’s better to go with the Roth. That way you’ll be paying taxes at a lower rate today.

So what about your federal income tax rates as a resident currently? For 2014, most of you will fall into the 25% marginal tax bracket as I would imagine you make either between $36,901 to $89,350 as a single filer, or between $73,801 – $148,850 for married joint filers. No one has a crystal ball to predict whether your tax rate will be higher than 25% when you start withdrawing money from you retirement savings account. It depends on your income, timing of your retirement, government tax policy, etc. A lot of people, including myself, practice tax diversification – holding both pre-tax and after-tax savings in retirement accounts – thereby hedging our bets.

For you as a resident, probably the more important question is whether to invest in a retirement account at all, and not whether to invest in Roth vs Traditional 403(b). The amount of money you most likely will be saving for retirement as a resident will be much smaller than when you will eventually be saving as an attending so it probably does not make all that much difference whether you choose Roth vs Traditional. Either way, if you decide to use the 403 (b) plan, you will get some sort of a tax advantage.


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