Benefits of contributing to a 403(b) plan

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Dear 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
More On 403(b) Plans:
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.
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