Author Topic: 403b and Tax Rate questions  (Read 2441 times)

texaslady22

  • 5 O'Clock Shadow
  • *
  • Posts: 51
403b and Tax Rate questions
« on: May 23, 2015, 09:12:32 AM »
I'm really new to this world, so please forgive my ignorance.

My college employer pays 3% of my salary into a 403b automatically.
If I pay 3%, my college matches it.
That's what I'm doing, so right now 9% of my salary is going into 403b. (6% of work and 3% from me)

I'd, obviously, like to put more away, but I don't know whether I'm better off doing a 403b or a Roth IRA or what.

I also don't know my tax rate. We normally get back everything we pay in taxes. We're a family with 3 kids who makes about 60K a year, if that's any indication. How would I know my tax rate?

How would I know what I'm supposed to do? Is a 403b my best bet (and just add more there) or should I do something else? I'm so sorry I don't know more about this, but I'm 30...I still have some time to do what's best!

seattlecyclone

  • Magnum Stache
  • ******
  • Posts: 4856
  • Age: 34
  • Location: Seattle, WA
Re: 403b and Tax Rate questions
« Reply #1 on: May 23, 2015, 09:33:39 AM »
As a first-order approximation of your tax rate, you can take your salary ($60k), subtract the married-filing-jointly standard deduction ($12,600), five exemptions ($20,000), and the 3% of your salary you're already putting into your 403(b) ($1,800), to get a rough taxable income of $25,600. If you itemize deductions or have other pre-tax payroll deductions (for health insurance, etc.), the number could be lower.

This would put you in the lower half of the 15% tax bracket (which goes from $18,451 to $74,900). You'll save 15 on taxes for every dollar you put in the 403(b) until you get your taxable income below $18,451, and 10 per dollar after that. This is only for federal taxes, state taxes vary and you'll have to estimate that yourself.

forummm

  • Walrus Stache
  • *******
  • Posts: 7396
  • Senior Mustachian
Re: 403b and Tax Rate questions
« Reply #2 on: May 23, 2015, 10:03:37 AM »
Do you think you'll spend more, less, or about the same in retirement? If your answer is the same or less, you'd probably be better off contributing to the 403b first. Ideally you'd max that out ($18k from you each year) and max out an IRA ($5500 per adult) on top of that. You may not have enough money to do that now, but that's something to stretch for.

texaslady22

  • 5 O'Clock Shadow
  • *
  • Posts: 51
Re: 403b and Tax Rate questions
« Reply #3 on: May 24, 2015, 07:42:45 AM »
So....

If I put $10 extra in a 403b and I'm in the 15% tax bracket, it saves me $1.50 in taxes (therefore I "make" 15%?)

That's interesting! I never knew that.

forummm

  • Walrus Stache
  • *******
  • Posts: 7396
  • Senior Mustachian
Re: 403b and Tax Rate questions
« Reply #4 on: May 24, 2015, 08:50:04 AM »
So....

If I put $10 extra in a 403b and I'm in the 15% tax bracket, it saves me $1.50 in taxes (therefore I "make" 15%?)

That's interesting! I never knew that.

It saves you $1.50 in federal taxes and however much in state taxes on top of that. But only this year. When you pull out the money in retirement, you have to pay taxes on what you pull out. However, when you're retired, you're usually in a lower tax bracket--sometimes 0% (due to deductions and exemptions). So you're paying less (sometimes nothing) when you pull it out than you would if you didn't put it in in the first place.

MDM

  • Walrus Stache
  • *******
  • Posts: 9496
Re: 403b and Tax Rate questions
« Reply #5 on: May 24, 2015, 03:17:08 PM »
If I put $10 extra in a 403b and I'm in the 15% tax bracket, it saves me $1.50 in taxes (therefore I "make" 15%?)

Or more.  See the two cases below.  The first has $1800 in 403b contribution, and the second has $1900.  In addition to the $15 saved on federal tax (and whatever on state: $2 in this example), one gets an extra $10 from the saver's credit.  Thus one actually saves 25% (plus state) of the extra $100 contribution, making it even more likely that a traditional plan will be better than a Roth.

Tables below are from the spreadsheet downloadable in the case study sticky.  Or you could use any of the various tax prep software packages for "what if?" calculations. 

$1,800/yr to the 403b:
CategoryMonthlyCommentsAnnual
Salary/Wages$5,000$60,000
401(k) / 403(b) / TSP / etc.$150Room to increase?$1,800
Employer Match$300$3,600
Income subject to IRS tax$4,850$58,200
Federal Total Inc.$4,850$58,200
Federal tax-$222015 rates, MFJ, stand. ded., 5 exempt.-$263
State/City tax$97Guess, using 2.00% * Fed. AGI$1,164
Soc. Sec.$310Assumes 2 earners paying$3,720
Medicare$73$870
Total income taxes$458$5,491
Filing Status21=S, 2=MFJ
# of earners2
Total Income$58,200
Std. Deduct.$12,600
Act. Deduct.$12,600
# Exempt.5
Exemption$20,000
AGI$58,200
Taxable$25,600
Tax$2,918
Savers' credit$180
Tax after n-r credit$2,738
# Children <173
Child Tax Cred.$3,000
EIC$0
Net Tax-$263



$1,900/yr to the 403b:
CategoryMonthlyCommentsAnnual
Salary/Wages$5,000$60,000
401(k) / 403(b) / TSP / etc.$158Room to increase?$1,900
Employer Match$300$3,600
Income subject to IRS tax$4,842$58,100
Federal Total Inc.$4,842$58,100
Federal tax-$242015 rates, MFJ, stand. ded., 5 exempt.-$288
State/City tax$97Guess, using 2.00% * Fed. AGI$1,162
Soc. Sec.$310Assumes 2 earners paying$3,720
Medicare$73$870
Total income taxes$455$5,464
Filing Status21=S, 2=MFJ
# of earners2
Total Income$58,100
Std. Deduct.$12,600
Act. Deduct.$12,600
# Exempt.5
Exemption$20,000
AGI$58,100
Taxable$25,500
Tax$2,903
Savers' credit$190
Tax after n-r credit$2,713
# Children <173
Child Tax Cred.$3,000
EIC$0
Net Tax-$288


curler

  • Stubble
  • **
  • Posts: 111
Re: 403b and Tax Rate questions
« Reply #6 on: May 24, 2015, 08:57:55 PM »

Or more.  See the two cases below.  The first has $1800 in 403b contribution, and the second has $1900.  In addition to the $15 saved on federal tax (and whatever on state: $2 in this example), one gets an extra $10 from the saver's credit.  Thus one actually saves 25% (plus state) of the extra $100 contribution, making it even more likely that a traditional plan will be better than a Roth.

Doesn't the saver's credit apply equally to Roth and Traditional, IRA and 403(b)?

MDM

  • Walrus Stache
  • *******
  • Posts: 9496
Re: 403b and Tax Rate questions
« Reply #7 on: May 24, 2015, 09:06:38 PM »
Doesn't the saver's credit apply equally to Roth and Traditional, IRA and 403(b)?
Depends on the definition of "apply".  From http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-Retirement-Savings-Contributions-Credit-%28Saver%E2%80%99s-Credit%29:
Quote
The amount of the credit is 50%, 20% or 10% of your retirement plan or IRA contributions up to $2,000 ($4,000 if married filing jointly), depending on your adjusted gross income (reported on your Form 1040 or 1040A).

Yes, all those count toward the "retirement plan or IRA contributions."  Only the traditional contributions reduce the AGI, which can affect the "50%, 20% or 10%" portion.  In the example above, any $100 contribution changes the saver's credit by $10.