Which Retirement Savings Plans Are Best for Teachers?
It’s probably best to have a diversified approach to your tax planning for retirement in the same manner you would have a diversified approach to your investments.

Q: I am 41 years old, and my wife and I are both public school teachers. We’ve been contributing to our 403(b) accounts in order to supplement our pensions, and we’ve each accumulated about $100,000. Because we are in a position to save more, we’re wondering if we should increase our contributions to our 403(b)s, save in Roth 403(b)s, or save in Roth IRAs. What is your opinion?
A: That’s a tricky question, because the answer is based entirely upon future tax laws, which are next to impossible to predict. Your current retirement savings into 403(b)s provides tax benefits to you now, but may or may not be the best for you in the long term. As with 401(k) plans, you receive a tax deduction for any contributions you make to a 403(b), which reduces your current income-tax bill, but, although your account grows tax-deferred, all withdrawals will be taxable when you are retired and pulling income from the account.
If we could know for certain that you are in a higher tax bracket today than you will be in retirement, there would be no question you should keep funding your 403(b)s and ignore the Roth options.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The problem is, of course, that we don’t know what your future tax situation will look like.
A Roth option, whether it be a Roth 403(b), or a Roth IRA, will not provide you with any current tax savings, but your account will grow tax-deferred and your withdrawals will NOT be subject to income taxes when you are retired and withdrawing the funds.
The challenge for those people who are still decades away from retirement is that we have no idea what the tax code will look like in the 20 or 30 years. The tax code, as complex as it is, hasn’t really changed that much in the past three decades. Tax rates are progressive, meaning the higher your income, the larger the percentage of your income that will be taken out for taxes.
What might the tax code look like in another 20 or 30 years? What if the progressive income tax system that we currently have is eventually replaced with a flat tax? Or a national sales tax? It would be a real bummer to use a Roth 403(b) or a Roth IRA for your retirement savings, only to have our tax system get replaced by a national value added tax (VAT) and a relatively low flat income tax.
Another factor to consider is the state in which you are working versus the state in which you plan to spend your retirement years. For example, if you are working in New York, with a high state income-tax structure, yet plan to retire in Florida, one of nine states with no income taxes, a Roth IRA or a 403(b) might not be helpful at all. In a situation like this, a traditional 403(b) (or an IRA) would be much more beneficial, at least as far as state income taxes are concerned.
Because it’s anyone’s guess as to what the tax structure will look like in the future, it’s probably best to have a diversified approach to your tax planning in the same manner you would have a diversified approach to your investments. Odds are, you don’t have your entire 403(b) plan balance in just one type of investment. Why? Because you know that having your investments spread around will provide you with the highest degree of certainty with your retirement savings.
You should have a similar approach with your income tax strategy. Ideally, you reach retirement with a number of different types of retirement plans. In a perfect situation, you’d have your 403(b) plans, some money in Roth IRAs (or 403(b)s), some investments held outside of your retirement plans, perhaps some income-producing real estate, etc.
If I were in your shoes, I’d contribute about 80% of my retirement savings to a traditional 403(b), and the remaining 20% to a Roth IRA. This would enable you to take advantage of the current tax savings that your 403(b) provides, while also allowing you to accumulate a nice chunk of cash that will not be subject to income taxes once you retire.
In regard to whether you should contribute to a Roth 403(b), or a Roth IRA, from an income standpoint, it really doesn’t matter that much, as both plans allow for tax-free retirement income. There are a few minor nuances between the two, but what I prefer with the Roth IRA is the investment flexibility. With a 403(b), your employer dictates which providers you can work with, whereas you have full discretion over a Roth IRA.
By the way, you are wise to be thinking about your retirement savings at such a young age. Far too many people wait until late in life to get serious about their savings, and the longer you wait, the tougher it is.
Scott Hanson, CFP, answers your questions on a variety of topics and also co-hosts a weekly call-in radio program. Visit MoneyMatters.com to ask a question or to hear his show. Follow him on Twitter at @scotthansoncfp.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Scott Hanson, CFP, answers your questions on a variety of topics and also co-hosts a weekly call-in radio program. Visit HansonMcClain.com to ask a question or to hear his show. Follow him on Twitter at @scotthansoncfp.
-
4 Money Habits Boomers Swore By That Millennials Are Walking Away From
Millennials are trading tradition for flexibility when it comes to building wealth.
-
Abu Dhabi Adventures: New Thrills, Iconic Sights and Disney’s Latest Park
Discover the mix of culture, wildlife and modern marvels that make this Middle Eastern city a destination to watch.
-
How Much Do I Need to Retire? A Financial Professional Breaks Down Your Options
What it all boils down to is will you be comfortable in retirement? Some people may rely on formulas, while others just aim for $1 million nest egg.
-
When You Need Capital Quickly, Think 'Ready, Set, Fund': A Financial Adviser's Strategy
Investors must be able to free up cash to meet short-term needs from time to time. This strategy will help you access capital without derailing your long-term goals.
-
I'm an Estate Planner: Moving Family Assets to a Safe Haven Abroad Could Be a Huge Headache for Your Heirs
In troubled times like these, wealthy clients may seek financial refuge outside of the U.S. But that could cause more tax and estate problems than it solves.
-
Fall Is Tax Time? Yes! Act Now to Make Needed Adjustments
Review your withholdings, contribute to tax-saving HSA and FSA accounts, manage a bonus' impact and adjust for major life events such as weddings and job changes.
-
Board Service in Retirement: The Best Time to Join a Board Is Before You Retire
Many senior executives wait until retirement to take a seat on a corporate board. But making this career move early is a win-win for you and your current organization.
-
A Financial Professional's Take on Long-Term Care Insurance: Buy or Not?
Unless you have about $6,000 burning a hole in your pocket every month, you should make a plan in case you need long-term care. Luckily, you have options.
-
The Hidden Risk Lurking in Most Retirement Plans: Human Behavior
What's one of the differences between a good financial adviser and a great one? The ability to use behavioral coaching to guide clients away from emotional decision-making and toward retirement success.
-
Addressing Your Clients' Emotional Side: Communication Techniques for Financial Advisers
Rather than focusing only on financial plans, you can better serve your clients — and grow your business — by learning what to say and do when a client gets anxious or emotional.