Advise needed: non-match Roth 403b, or matched 403b

[deeppizza]

Looking for any advise about changes to my employer's 403b plan. Currently I contribute $18K to a 403b, and get a 1.75% match into a 401k. Was told yesterday that my employer will be allowing Roth option to the 403b plan beginning in Sept, but any contributions to the Roth will NOT receive any match. The plan will not allow in-plan transfers from non-Roth to Roth (at lease for now). Due to my salary, contributing up to the match (4%) maxes out my annual contributions. The retirement plans manager told me that by law, a plan can only recognize 2017 earnings up to $270K for match. I've already hit my maximum match for this year of $4725 (1.75% of $270K) into the 401k, but still have $3600 left to be able to contribute to the 403b for the rest of this year (which I can choose to direct to Roth in Sept).

I think I'll switch the rest of this year's 403b contributions to the Roth, but what do you think I should do beginning in 2018? The idea of a "free" $4725 with the match is obviously enticing, but my time horizon for retirement is > 30 years, and the idea of having gains taxed out of a 401/403b at retirement at maximum regular income tax rate (which is what I'm at now, and anticipate I'll be at retirement) wears on me. I also want to avoid RMDs (hoping that I won't need the income at retirement).

Should I just contribute $18k into Roth 403b, but get no match? (pros: no future taxation, no RMDs; cons: lose out of $4725/year)
Contribute 4% every two weeks into the regular 403b until I hit the maximum match, and then transfer the remaining contribution balance into the Roth 403b (pros: still get the max match, able to contribute some to Roth; cons: still have to deal with significant future gains tax and RMDs, lower balance in Roth)

Love to hear some thoughts.

[Dreamgiver]

Are you already doing a backdoor Roth?

[deeppizza]

Yes, already do a backdoor Roth in addition to 18K in a 457b.

[jfoxcpacfp]

Are you positive there is no match if you contribute to a Roth? That doesn't exactly make sense and I'm not sure it's even allowed. Employers cannot match a Roth with a Roth because the employer match is always "pre-tax". Maybe you should get clarification - perhaps this is what your employer is trying to say.

Otherwise, I hate to see you pass up that match. Wonder if your employer allows in-service conversions to the Roth?

[deeppizza]

I thought it was odd that they wouldn't allow a match if I chose to go with the Roth as well, but I asked again for clarification, and that is what they're saying.
That's why I feel a little bit torn as what to do beginning in 2018.

[jz]

As jfox stated, I Rothed my 403b for a few years.  It is now a combo of X% pretax and 1-X% postax.

[Stealth Wealth mD]

That doesn't make any sense. I also Roth my 403b with an employer match. As was said before, I think the confusion here is that employers can't match a Roth with post-tax money and so an employer match always has to be pre-tax.

Maybe you should try asking a supervisor or someone in charge?

[deeppizza]

I spoke with the manager in HR who oversees all the retirement plans, and he confirmed that there is no employer match for any contributions made to a Roth 401k/403b.  The match will only occur with contributions to the regular 401k/403b, and as you stated, the match can only be placed pre-tax.

[jfoxcpacfp]

deeppizza wrote:

I spoke with the manager in HR who oversees all the retirement plans, and he confirmed that there is no employer match for any contributions made to a Roth 401k/403b.  The match will only occur with contributions to the regular 401k/403b, and as you stated, the match can only be placed pre-tax.

Click to expand...

I would love to know what the rationale is for that! You're paying taxes on the front end for contributing to a Roth and you don't get a match. Sounds like dirty pool to me.

[deeppizza]

I agree.  Just don't know if there's any recourse though.  Unless there's something that I can find that states it's not allowed to refuse matching based upon the type of retirement account (pre-tax vs post-tax), especially when both are offered, I don't think there's much I can do.

[Craigy]

IMO that's too much money to leave on the table.  Even if you consider it's pre-tax match money, that's still almost $3,000 post-tax money if you assume a ~40% tax rate.  Not that you're taking it out right now, but pre-tax money is worth less than post.

If all you're going to do investment wise is max out one account or the other, you could still in theory come out ahead by just filling the Roth, given that you are able to stash that much more value in by its nature of being post-tax money.  But since the match is pretty decent, you're not going to come out ahead by much.  However, nothing's stopping you from maxing out the 403b, and then using the tax savings to fund a taxable account.

My practical advice to you would be to be the squeaky wheel on this issue in your organization. Seemingly they should be able to put your match your Roth 403b contributions by putting match money into a regular 403b, at the very least.  Even if you're in a large organization, find out who makes the decisions for this plan (not just the HR person who handles the day-to-day, but the people who make the big decisions on the account, probably one or two of the MDs on the board), and let them know this doesn't make sense, and really neuters the Roth 403b.

Better yet, find out who was responsible for getting the Roth option in the first place.  That sort of thing usually takes some effort.  Plus, that person would be someone who knows how to get things like this accomplished, and would be someone who would be dismayed to find out that the efforts spent to get the Roth option was a waste because someone else in HR or the plan administrator couldn't figure out how to implement a match.

[deeppizza]

This was the response I got from the Retirement Plan manager:

"A number of years ago, *** established a core 401k option which includes an employer matching contribution to support our employees as they plan for retirement.  The match is only aligned to the core 401k option to promote pre-tax savings in the plan.   *** has aligned the employer match to promote the pre-tax option as this approach is the most prevalent design for employer 401k plan offerings, incents pre-tax contributing which better positions plan participants through tax deferred savings and in general reduces the complexity in administration and communications of the plan. 

 

*** may consider a match for the Roth option in the future.  In the meantime, I would expect that a fair number of people will modify their contributions to a 4% pre-tax (to get the full match) and a certain % as Roth on top of the pre-tax.

 

I hope that this is helpful."

[Craigy]

At least you got a response!

Definitely respond and register your interest in a Roth match.  Try to find others to do the same.