The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: MoonPilgrim on September 18, 2012, 01:07:06 PM
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So, if I'm understanding my company's benefits guide correctly, I can contribute up to $17K to a 403(b) and ANOTHER $17K to a 457(b). With a gross income of $80K, does that mean maxing out will save me $8500 in taxes ($34K * tax rate of 25%)?
I can't believe that I've been working here for five years and had no freaking clue how much more money I could be making (face punch).
If I'm off-base, let me know, because I have some spreadsheet revising to do....
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Yes, its true. You can save exactly that - It's what I do :) The 403b is the equivalent to the for-profit 401ks, and the 457b is a retirement account offered by governments (state and local) to their employees, and you can max each out separately.
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That is so cool! Someday I'm going to have to calculate the amount of money that I've "made" just by being around all of these Mustachians! The more I learn, the more I save, and I'm really early on in my journey, but I can feel the momentum and see things starting to snowball.
Better late than never, right? :)
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The 457 plan is a wonderful tool. You do NOT have to wait until age 59 1/2 to withdraw from it. It is simply "deferred compensation," so once you leave the job, you can pull money out and only pay income tax on what is distributed. You also have the option of rolling the money into an IRA when you leave, although you lose the early withdrawal feature if you do that.
If you contribute to the 457 plan, you can use the investments as part or all of your pre-age 59 1/2 FIRE income stream. Maxing that plan out can bridge the income gap for many early retirees.
Yes, you can contribute the maximum amount to BOTH plans, which for 2012 is $17,000 each if you are under 50. Go for it!
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I'm 100% in favor of you doing this, but you are a little off on the tax savings. For 2011 for married filing joint status, the 25% rate didn't start until $69,000 in
TAXABLE income. After you take off any pre-tax deductions from your gross, your exemptions (3700 per person), and standard or itemized deductions I'm guessing you are only in the 15% bracket so it's more like $34K x 15% for savings.
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Thanks, Michelle! That makes sense. I'm still amazed by the difference it will make--it finally clicked for me why everyone says to maximize the pre-tax contributions.
Before I started thinking about savings and interest and inflation it was always kind of a mystery why people advocated so strongly for putting funds into those types of accounts--I thought that the IRS gets their taxes either way, and if there are penalties for and/or restrictions on accessing it, it wasn't all that practical. But now I see that I get to invest the tax savings AND by the time it turns into taxable income, I'll be in a lower bracket.
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Don't forget it escapes state income taxes as well (if your state has one), this can easily be another 6%-10%.
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The 457 plan is a wonderful tool. You do NOT have to wait until age 59 1/2 to withdraw from it. It is simply "deferred compensation," so once you leave the job, you can pull money out and only pay income tax on what is distributed. You also have the option of rolling the money into an IRA when you leave, although you lose the early withdrawal feature if you do that.
If you contribute to the 457 plan, you can use the investments as part or all of your pre-age 59 1/2 FIRE income stream. Maxing that plan out can bridge the income gap for many early retirees.
This. The 457 is the perfect vehicle for FU money.