The 403(b) plan is one of the best tax breaks available to people during their working years. If your employer matches your contribution, then it's too good to pass up. Even if your employer doesn't match, it's probably still worth taking advantage of this tax-advantaged savings opportunity.



When you contribute money to your 403(b) plan at work, the amount you contribute reduces your taxable earnings and grows tax deferred. Let's say you're in the 27% tax bracket, and pay 6% in state income taxes. That means that if you contribute $10,000 into your 403(b) plan, you'll save $3,300 in taxes. It will only cost you $6,700 to have $10,000 growing tax deferred in mutual funds.



During your working years, you're generally allowed to borrow up to 50% of the balance in your 403(b) account - as much as $50,000. So the money is accessible. You just need to be careful if you're considering changing jobs, since if you leave your employer and still have an outstanding loan on your 403(b) account, the balance becomes taxable to you unless you're able to repay the full amount due.



When you ultimately withdraw money from your 403(b) plan, you will owe taxes on the money withdrawn. However, keep in mind that the government lets you keep the compounded earnings on the deferred tax savings for all those years. That's what makes these plans so attractive. (In my example, you invest the $3,300 of tax savings in your 403(b) account and keep the earnings on that money.)



You also asked about Roth IRAs. They are attractive as well. With a Roth, you forego a tax savings today, but the Roth grows tax-free. That means you pay no taxes when you withdraw the money after reaching age 59 1/2, or if you meet certain other exceptions. One reason to contribute to a Roth IRA now is that you won't be allowed to contribute once your earnings increase to more than $110,000 if you're single or $160,000 if you're married. The maximum contribution to a Roth IRA this year is $3,000 ($3,500 if you're 50 or older by 12/31/02.)

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Replying to:

My hospital refuses to match contributions to a 403B plan for residents. They do match with anyone else in the hospital from executive to cafeteria worker. Their reasoning is 1) that residents are not considered permanent employees and 2) are they employees or students? (which is a whole discussion in itself). btw, they do take out SS taxes. I want to know if anyone else has a similar situation or do their hospitals match their 403b plan. And what are my options. (I have a roth already). Thanks

Zip Code: cpa@mdtaxes.com

It is not uncommon for hospitals to exclude Residents as a "separate class" of employees. You can ask them for a copy of their SPD (Summary Plan Document) to verify this exclusion.



I agree with Andrew:

403(b):If you like the investment options in the plan you can still make non-matching contributions and save on taxes. This is, in effect, a government subsidy (or match).



Roth IRA: I love Roths! This is very flexible and powerful vehicle for savings. If you are still eligible this is great option.

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Replying to:

My hospital refuses to match contributions to a 403B plan for residents. They do match with anyone else in the hospital from executive to cafeteria worker. Their reasoning is 1) that residents are not considered permanent employees and 2) are they employees or students? (which is a whole discussion in itself). btw, they do take out SS taxes. I want to know if anyone else has a similar situation or do their hospitals match their 403b plan. And what are my options. (I have a roth already). Thanks

Zip Code: BWeinstein@mdtaxes.com