Welcome to the MDTAXES Message Board

The MDTAXES Network is an affiliation of CPAs that specialize in the tax planning and preparation for young health care professionals.  Please leave your questions or comments for our CPAs, who visit the message board regularly, or review the answers, suggestions and ideas posted in response to your colleagues' questions.

Please check out our other Message Boards available at www.FindAGoodCPA.com.

Please note: We are NOT affiliated with the Maryland Tax Department. If you're looking for information about Maryland income taxes, go to www.marylandtaxes.com.

Original MDTAXES Forum
Start a New Topic 
Author
Comment
View Entire Thread
Re: 403(b)

A 403(b) plan, also known as a tax-sheltered annuity or a tax-deferred annuity, is a special type of nonqualified retirement plan under which certain government and tax-exempt organizations (including religious organizations) can purchase annuity contracts or can contribute to custodial accounts for eligible employees.

Contributions made to the plan will reduce your taxable income and all earnings will grow on a tax-deferred basis.

The plan mimics qualified plans in that it's subject to many of the same rules, including the requirement that money may not be withdrawn by an employee until he or she reaches age 59½. If he or she does, there is a 10% penalty for early withdrawal in addition to the ordinary income taxes that are due.

Bear in mind that the government can change the age that you can withdraw money from the plan in the future. You will also be subject to paying income taxes based on rates in the future that might be higher than your income tax bracket today.

Hope this helps.

Larry

Re: Re: 403(b)

I wrote quite a few articles about the benefits of contributing to these tax-advantaged retirement plans. There is an index of the articles at www.mdtaxes.com/oldnews.html. I'm a big fan of them.

Check out this article that I wrote a few years ago in the May, 2004 newsletter available at www.mdtaxes.com/news0504.html:

INVEST THE GOVERNMENT'S MONEY AND KEEP THE EARNINGS

by Andrew D. Schwartz, CPA

Imagine the government depositing thousands of dollars into your savings account each year and letting you keep the interest. Sound too good to be true? When you contribute to your 403(b) plan or 401(k) plan at work, that's exactly what happens.

Most employers offer either a 403(b) plan or a 401(k) plan as a way to help their staff save for retirement. Not-for-profit hospitals and universities generally offer 403(b) plans. Most other businesses offer 401(k) plans. Besides the name, there isn't a big difference between these two retirement savings plans these days.

Amounts contributed to either of these plans reduce your taxable earnings and grow tax deferred. For 2004, you can contribute up to $13,000 through salary deferrals. Anyone 50 or older by December 31 can sock away an additional $3,000. These amounts are in addition to any money that your employer contributes to the plan on your behalf.

Let's say that you're in the 28% federal tax bracket, and live in a state that has a 5% income tax. Your marginal tax rate, therefore, is 33%. By contributing $13,000 into your 403(b) plan or 401(k) plan at work this year, you'll save $4,290 in taxes ($13,000 * .33).

If you max out your contributions to this retirement savings opportunity, it only costs you $8,710 in after-tax dollars to have $13,000 in a portfolio of mutual funds growing tax-deferred. Do the math and you'll see that you already earned a whopping 49.25% return on your salary deferrals ($4,290/$8,710).

Yes, you'll need to pay back those taxes when you begin taking distributions out of your retirement account. But you get to keep the earnings on the tax savings for all the years that the money remains invested within your account.

How much will you end up earning on the government's money if you contribute $13,000 into your retirement account annually for the next 25 years and assuming an average rate of return of 8% per year on the money invested? Thanks to the power of compounding, the earnings on the $4,290 of tax savings that you get to keep invested within your 403(b) account or 401(k) account each year will exceed $230,000. I don't know of many other ways that you can legally pocket that much of the government's money without ending up with free room and board, and a complimentary wardrobe of orange jumpsuits.

Contributing to your employer's 403(b) plan or 401(k) plan is one of the best tax shelters available to professionals during their working years. And with the top federal tax bracket current running at 35%, and with the tax rates of some states approaching 10% or more, high income individuals will realize an even greater tax savings than the numbers reflected in this example. So even if money is tight, or a financial advisor is trying to steer you towards an alternative such as a Variable Universal Life Insurance Policy (VUL), maxing out this tax-advantaged retirement savings opportunity is generally too good of a deal to pass up.

Zip Code: 01801