403(b) Investing [Video 2 of 4]: Should you save there, and how much?

Following on from the first video, we look to explore how to save to a 403(b). In this video, learn how much you can contribute to a 403(b) depending on your age and tenure. Also, understand if a 403(b) is the right option for you depending on your projected pension amount, and what other options you have. Enjoy!

 

Watch part 3 of 4 here.

   


 

In the second part of this video series, we’re going to talk about: Okay, you’ve chosen to invest in a 403(b), what’s next?

Well, the first thing you have to do is: you have to understand how much you can contribute to that account. Now there are three limits when it comes to investing in 403(b)s. The first limit is for everyone. If you’re under fifty, you can contribute $17,500,in 2013, in any given calendar year. So, that’s a nice way to max it out.

Now, if you’re over fifty, you get to do what’s called the catch-up contribution. So you get to make an extra $5,500 per year to that account on top of the $17,500. So, you get to put in $23,000 (in 2013).

Now, those contribution limits do go up. Every year, they go up about $500 and are going to be indexed to inflation, and $500 has usually been the minimum that those limits have gone up by.

But, that’s not all. If you are a teacher and you have been in your district for more than fifteen years, you get to do an additional contribution on top of the age catch-up (if you’re eligible), and on top of the original contribution amount. So you can contribute an extra $3,000. So, if you’re over fifty and you’ve been in your district for more than fifteen years, you can do $26,000 to a 403(b) every single year.

Now, there’s some quirks to that service catch-up role. You have a limit of how much you can contribute. And that’s where we come in to play; we can help figure out how much you’re eligible to do.

So with all that being said, if you’re over fifty and you can do $26,000 a year that is an impressive amount of money you can save. But, don’t do it just yet. One question you want to ask yourself is: should you be contributing that amount to a 403(b), and should you be doing the 403(b) at all. Now, one of the things you have to think about is your pension. Your pension, for example, it’s going to be seventy-five percent of your final salary. If you’re earning a $100,000, that’s $75,000 annual pension. That’s going to be pretty significant.

You want to be careful. Your pension is going to put you in a minimum tax bracket every single year in retirement. So let’s say a $75,000 pension puts you in the 25% tax bracket. Twenty-five percent is going to be your minimum every single year, and if tax brackets change, then it could go up. All the money that you take out of your 403(b) is fully taxable. So the first dollar that comes out is going to be taxed at 25%.

Now, let’s say you took out $50,000 of your 403(b) and with your pension and your 403(b) contribution; it pushed you to a higher tax bracket. So now, you’re going to be paying more than 25% on all the withdrawals you take from your 403(b).

So, what are your options? You really have two. One, you can save to a Roth 403(b), or a Roth IRA. That means you’re paying the taxes on the money now, and it’s going to be tax free whenever you take it out in retirement. Your other option is to not do any retirement savings at all, but yet actually pay taxes on the money now and put it in a brokerage account. The advantages to doing that is: you do not have to take out any type of minimum distribution when you’re getting older from a brokerage account at all.