Author Topic: 403B Contributions and Taxes  (Read 3637 times)

Zman

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403B Contributions and Taxes
« on: April 02, 2015, 09:13:29 AM »
Hi I am just trying to figure out how my taxes are affected by increasing my 403b contributions...

If I make about $70K taxable a year and am currently contributing $7,500 to my 403B that means my taxable income is 62500.
-- I pay $15,625 in tax (lets put me at 25% tax to make it easy)

If I up it to the full 17500 I make 52500 in taxable income
-- I pay $13,125 in tax

SO
Does this mean my tax refund will be $2,500 higher at the end of the year? or does the amount taken out of my taxes get adjusted and the refund will be the same?


(Any other tax hacks I should be thinking about for next year?)

kwh03001

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Re: 403B Contributions and Taxes
« Reply #1 on: April 02, 2015, 09:43:05 AM »
The taxes owed by you is dependent on several things, including your filing status (single, married filing jointly, etc.), mortgage interest and property taxes, dependents, etc.

I actually just posted something very similar last week which could be helpful:

http://forum.mrmoneymustache.com/ask-a-mustachian/optimizing-taxes-and-401k-contributions/

If you can provide some more information on any of the things mentioned above, we can get a good idea of what your best course of action is.

If I assume your are talking about taxes for 2015, the maximum contribution for this year is $18,000.

seattlecyclone

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Re: 403B Contributions and Taxes
« Reply #2 on: April 02, 2015, 09:50:28 AM »
Hi I am just trying to figure out how my taxes are affected by increasing my 403b contributions...

If I make about $70K taxable a year and am currently contributing $7,500 to my 403B that means my taxable income is 62500.
-- I pay $15,625 in tax (lets put me at 25% tax to make it easy)


This is not how income taxes work. Presuming you're a single person who doesn't claim itemized deductions:
Gross income:           $70,000
403(b) contribution    -$ 7,500
Standard deduction     -$ 6,300
Personal exemption     -$ 4,000
-------------------------------
Taxable income          $52,200


Now, the tax is not 25% of this amount. You get to pay lower rates for whatever portion of your income falls into the lower brackets:
First $9,225 of income taxed at 10%              $9,225  * 10% = $  922.50
Up to $37,450 taxed at 15%           ($37,450 -  $9,225) * 15% = $4,233.75
Up to $90,750 taxed at 25%           ($52,200 - $37,450) * 25% = $3,687.50
--------------------------------------------------------------------------
Total tax                                                        $8,843.75


Because you are well into the 25% bracket, an additional $10,000 of 403(b) contributions will result in $2,500 less tax owed. This does not necessarily mean that your refund will be $2,500 larger. Your withholding per paycheck should go down when you increase your contributions. Your year-end refund shouldn't go up or down by very much at all. In fact, if you are getting a $2,500 refund every year you should adjust your withholding to have less taken out each paycheck. A tax refund means that you gave an interest-free loan to the government. Try to avoid that!

Zman

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Re: 403B Contributions and Taxes
« Reply #3 on: April 02, 2015, 09:51:24 AM »
I noticed it was 18K as i was looking right after posting that... Thanks

I file Single and zero
no mortgage
no property tax
no dependants

Zman

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Re: 403B Contributions and Taxes
« Reply #4 on: April 02, 2015, 10:05:24 AM »
Hi I am just trying to figure out how my taxes are affected by increasing my 403b contributions...

If I make about $70K taxable a year and am currently contributing $7,500 to my 403B that means my taxable income is 62500.
-- I pay $15,625 in tax (lets put me at 25% tax to make it easy)


This is not how income taxes work. Presuming you're a single person who doesn't claim itemized deductions:
Gross income:           $70,000
403(b) contribution    -$ 7,500
Standard deduction     -$ 6,300
Personal exemption     -$ 4,000
-------------------------------
Taxable income          $52,200


Now, the tax is not 25% of this amount. You get to pay lower rates for whatever portion of your income falls into the lower brackets:
First $9,225 of income taxed at 10%              $9,225  * 10% = $  922.50
Up to $37,450 taxed at 15%           ($37,450 -  $9,225) * 15% = $4,233.75
Up to $90,750 taxed at 25%           ($52,200 - $37,450) * 25% = $3,687.50
--------------------------------------------------------------------------
Total tax                                                        $8,843.75


Because you are well into the 25% bracket, an additional $10,000 of 403(b) contributions will result in $2,500 less tax owed. This does not necessarily mean that your refund will be $2,500 larger. Your withholding per paycheck should go down when you increase your contributions. Your year-end refund shouldn't go up or down by very much at all. In fact, if you are getting a $2,500 refund every year you should adjust your withholding to have less taken out each paycheck. A tax refund means that you gave an interest-free loan to the government. Try to avoid that!


THANK YOU!!!!!

So if my pay stub looks like the attached image... does that mean I am in the lower tax bracket? Should I do that?

Also what is personal and standard deduction? If i can factor those in maybe I dont have to contribute everything to the 403B (I do need some money to live afterall)




seattlecyclone

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Re: 403B Contributions and Taxes
« Reply #5 on: April 02, 2015, 10:21:58 AM »
So if my pay stub looks like the attached image... does that mean I am in the lower tax bracket? Should I do that?

I don't understand the question. What exactly would you be doing based on knowing your tax bracket?

Quote
Also what is personal and standard deduction? If i can factor those in maybe I dont have to contribute everything to the 403B (I do need some money to live afterall)

These are amounts you get to subtract from your gross income before you calculate taxes. The first $10,300 of income is tax-free. It's not an expense you owe.

Zman

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Re: 403B Contributions and Taxes
« Reply #6 on: April 02, 2015, 10:38:37 AM »
So if my pay stub looks like the attached image... does that mean I am in the lower tax bracket? Should I do that?

I don't understand the question. What exactly would you be doing based on knowing your tax bracket?

Quote
Also what is personal and standard deduction? If i can factor those in maybe I dont have to contribute everything to the 403B (I do need some money to live afterall)

These are amounts you get to subtract from your gross income before you calculate taxes. The first $10,300 of income is tax-free. It's not an expense you owe.

I'm just trying to figure out how to minimize taxes.... People are always talking about getting to the next (lower) tax bracket so im just wondering if i can get to the 15% bracket, will it give me a big savings or tax advantage? Or is it all just a moot point and I should save for housing or put money in a taxable account (for FIRE) instead?

kwh03001

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Re: 403B Contributions and Taxes
« Reply #7 on: April 02, 2015, 11:03:26 AM »
Until you get down to $37,450 in taxable income, every dollar you contribute to a tax advantaged account saves you 25 cents in taxes.

Another thing to consider is health care costs, as the money spent there is not federally taxed.

BarkyardBQ

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Re: 403B Contributions and Taxes
« Reply #8 on: April 02, 2015, 11:18:05 AM »
Quote
I'm just trying to figure out how to minimize taxes.... People are always talking about getting to the next (lower) tax bracket so im just wondering if i can get to the 15% bracket, will it give me a big savings or tax advantage? Or is it all just a moot point and I should save for housing or put money in a taxable account (for FIRE) instead?

It's always better to pay less taxes and let more of your money grow for you now, and get taxed on smaller portions of it later.

http://rootofgood.com/make-six-figure-income-pay-no-tax/
http://www.madfientist.com/retire-even-earlier/

seattlecyclone

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Re: 403B Contributions and Taxes
« Reply #9 on: April 02, 2015, 11:24:27 AM »
I'm just trying to figure out how to minimize taxes.... People are always talking about getting to the next (lower) tax bracket so im just wondering if i can get to the 15% bracket, will it give me a big savings or tax advantage? Or is it all just a moot point and I should save for housing or put money in a taxable account (for FIRE) instead?

Here's the thing about tax brackets: you don't have "big savings" by going from just above one tax bracket cutoff to just below it. If your income is $1 above the cutoff for the 25% bracket, lowering your income by a dollar will save you 25 on your taxes. If you lower your income by another dollar, you'll save 15 on your taxes.

As to whether you should give up on tax-deferred accounts because you want to retire early and need access to that money, the answer is an emphatic no! You can get access to that money in a variety of ways before you turn 59, and the money you save on taxes now by contributing to these accounts will help you retire even earlier than if you saved in a taxable account.

I explain this often enough that I made a blog post so I don't have to type it all again. https://seattlecyclone.com/accessing-your-retirement-accounts-early-yes-you-can/