What Are 403b Benefits?

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    Contributions

    • Contributors to a 403b plan do not pay income tax on their contributions until they take distributions upon retirement, but they do pay Social Security and Medicare tax on contributions. This allows plan contributors to compound their retirement investments tax-free, allowing for a much larger monthly payout when they retire. In addition, employers can choose to match an employee's contributions dollar for dollar.

    Deferral

    • According to the IRS, employees can reduce their salary by $16,500 a year for the 2010 and 2011 tax years with a 403b plan through a process known as an elective deferral. As of March 2011, employees with 15 years of service in a charitable organization can make an elective deferral of $19,500 per year. These limits are much higher than maximum allowable Individual Retirement Arrangement (IRA) contributions. Since employees deduct contributions from their earnings, they can fall into a lower tax bracket, resulting in a greater tax refund.

    Credit

    • If an employee or her employer contributes to an employee's 403b plan, the employee can receive a Retirement Savings Contribution Credit, alternatively named a Saver's Credit, worth up to $1,000 if single or $2,000 if filing jointly. This credit reduces an employee's tax liability dollar for dollar. Single contributors who have an adjusted gross income of $27,750 or less for the 2010 tax year and married couples who made $55,500 or less for the year qualify for the credit. Depending on the taxpayer's income, she will qualify for a credit worth between 10 and 50 percent of her yearly 403b contributions.

    Distributions

    • Employees can receive monthly payouts from their 403b plan after reaching 59-1/2 years of age. When an employee retires, he will usually have less income than when he was employed. In this case, the retiree will fall into a lower tax bracket, meaning that he will pay a lower tax rate on his distributions than he would have paid in income tax while working. In addition, persons older than 65 can claim an additional deduction on their income tax return, lowering their tax burden even further.

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