taxes

Benefits of contributing to a 403(b) plan

Judy O'ConnorDear Tax Talk,
I have a 403(b) plan where I deposited funds while working for a school system. Now I am retired and 66 years old. I withdrew 10 percent of the funds recently. I authorized the company to withhold federal and state taxes.

I am confused. If I am entitled to withdraw 10 percent or less from the fund without a tax penalty, why do I have to pay taxes? It seems that the 403(b) did not help in terms of taxation. What are the benefits of contributing to a 403(b) plan, anyway?
-- Amilcar

Dear Amilcar,
Congratulations on your retirement! A 403(b) plan is a retirement plan for certain employees of public schools, certain tax-exempt organizations and certain ministers and is designed to benefit you in terms of taxation.

There are three benefits of contributing to a 403(b) plan. First of all, you do not pay income tax on allowable contributions until you begin making withdrawals from the plan, which in your case is now that you are retired. The rules would be different if you had made the contributions to a Roth program, but it seems that is not your situation, so I will not go into that in any detail now.

The second benefit is that earnings and gains on amounts in your 403(b) account are not taxed until you withdraw them. That means over the years, you invested funds that were not taxed in the years that they were earned so they were able to grow tax-free until you withdrew them. You may even be in a lower tax bracket now that you are retired, so keep that in mind.

A third benefit is that you may have been able to take the Retirement Savings Credit of up to $1,000 (up to $2,000 if married filing jointly) for the elective deferral you contributed to your 403(b) plan. This credit reduces the federal income tax you pay dollar for dollar. If eligible, you would have claimed it in the year that you made the contribution.

You might want to consider taking a look at your last three years of tax returns to see if you could have claimed it. If it makes a difference, you can file an amended Form 1040X. The credit is calculated and claimed on Form 8880.

I hope this information helps ease your mind about the wise decision you made in contributing to the 403 (b) plan.

Ask the adviser

To ask a question on Tax Talk, go to the "Ask the Experts" page and select "Taxes" as the topic. Read more Tax Talk columns.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.

Bankrate's content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate's Terms of Use.

advertisement

Show Bankrate's community sharing policy
          Connect with us
REFINANCE HOME EQUITY AUTO CDs CREDIT CARDS
Product Rate Change Last week
30 year fixed refi 4.01%  0.19 4.20%
15 year fixed refi 3.09%  0.08 3.17%
10 year fixed refi 3.16%  0.02 3.14%
 
View Rates in your area Next
Product Rate Change Last week
30K FICO-based HELOC 4.32%  0.02 4.30%
50K FICO-based HELOC 4.06% --0.00 4.06%
100K FICO-based HELOC 3.92%  0.01 3.91%
 
View Rates in your area Next
Product Rate Change Last week
60 month used car loan 2.81% --0.00 2.81%
48 month used car loan 3.04% --0.00 3.04%
60 month new car loan 3.24% --0.00 3.24%
 
View Rates in your area Next
Product Rate Change Last week
1 Year CD 1.00%  0.02 0.98%
2 Year CD 1.19%  0.02 1.17%
5 Year CD 1.85% --0.01 1.86%
 
View Rates in your area Next
Product Rate Change Last week
Balance Transfer Cards 15.73%  0.02 15.75%
Cash Back Cards 16.43%  0.02 16.45%
Low Interest Cards 10.98%  0.02 10.96%
 
Next
advertisement
DAILY TAX TIP NEWSLETTER

Get expert advice during tax season on tax preparation and tips for cutting your tax bill.

advertisement
Dec. 31 will be here before you know it, so take some time now to make year-end tax moves that could lower your 2014 IRS bill.
Partner Center
advertisement

Connect with us