403b

[n_a_t]

is there any advantage in making tax-deferred contributions that are unmatched by the employer to a 403b plan while in medical residency? what do you all think?

by contributing, presently i can avoid being taxed at, let's say, 30%. later, when i'm in a higher tax bracket, they'll tax both my contribution and it's earnings at, picking a higher number, 45%. is there any benefit to me to take part in an unmatched 403b in the first place? (and of course, i would not even dream of doing any such thing before maxing out a Roth IRA).

also, which taxes are avoided now that will have to be paid later: federal, state, medicare, social security?

appreciate any info. there was a post a while back addressing the issue in which order to make contributions, i think it mentioned a matched 401k/403b first, and then an ira. but it did not mention unmatched plans. maybe the original poster is still out there and could shed some light on the matter.

thanks again!

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[Sol Rosenberg]

You can possibly get the best of both worlds. I know that there are "Roth 401k" plans (and presumably similar "Roth 403b" plans, but I don't follow 403b plans in detail, though they are essentially the same as 401k plans.) Your employer must offer such a plan, however (for example, my current employer has decided NOT to offer such a plan even though they may legally do so.)

As far as whether making unmatched contributions is to your benefit, you need to do the math/a lot of estimating. Tax-deferred plans like 401k plans only make sense if you expect to be taxed in a lower bracket at the time you withdraw the money than when you deposit the money. In the case of residency, this might not be the case (i.e. you might come out ahead if you just pay the tax, put it in a brokerage account, and pay capital gains on the earnings.) You have to crunch the numbers and make a lot of assumptions about how much you will save over your entire working life (as physicians, this number is probably significant) to have an "answer."

When I was fresh out of school, tax-deferred plans seemed like a great deal, but as I get older and my balances grow, and I see that I will, most likely, be seeing large distributions (401k plans have a certain maximum number of distributions that you can take once you retire so you can't necessarily spread your distributions over a very large number of years for maximum tax savings) and it is questionable whether I will come out ahead with respect to taxes.

 

[etf]

apparently in 2010 you'll be able to convert traditional ira's into roth ira's. you'll have to pay taxes on the conversion, but i'm assuming that you'll still be in a low tax bracket in 3 years. so basically, 403(b) is a better option than the ira because you can put away $15,000 into a 403(b), whereas you can only do like $4000 in the ira. the taxes you defer are basically capital gains taxes, although this (at the present) is a max of 15% for long term gains, while distributions out of a retirement account are considered ordinary income and will thus be taxed higher. the benefit of deferring those taxes is that uncle sam's money works for you until you cash out - it's kinda like margin, except instead of paying interest your loan balance goes down 3% every year due to inflation.

 

[etf]

(401k plans have a certain maximum number of distributions that you can take once you retire so you can't necessarily spread your distributions over a very large number of years for maximum tax savings)

simple; roll over your 401k into an ira. no taxes due, and you can spread your distributions out.

 

[The White Coat Investor]

Find out if your 403b matches your contributions. If it does, contribute up to the match. That is free money. Then take the remainder of your investment dollars and contribute it into a personal Roth IRA and a spousal Roth IRA. If you still have more investment dollars (you must be moonlighting like mad), and have gotten your full match and have maxed out the IRAs (8K for 2006 and 8K for 2007), only then should you continue to contribute to the 403b. If you manage to max that out, you can then look into a taxable brokerage account for further investments.

Residents are almost always better off in a Roth type investment then a traditional IRA/401K/403b, but even a traditional IRA has two advantages going for it that make it worthwhile to contribute prior to taxable investments:

1) Tax deferred growth
2) A tax deduction available now.

One caveat, if the expense ratios on the 403b funds are very high (say >1.5%), and you'll be at a job for a long time, you may be better off in taxable investments over the long run. But presumably, you'll graduate from residency and leave the 403b plan and can at that time roll the 403b over to an IRA and pick low-cost funds at Vanguard or elsewhere.

 

[mshheaddoc]

What about if the 403b doesn't match? Also not all funds have expense ratios (which I found out and was THRILLED!). I think etf's reasoning would be the same reasoning I would use when thinking about IRA vs. 403b.


Also, call me an idiot, but what are the minute differences of a 403b and 401k? I have only had experiences with 401k's and I don't see much difference in either of them ...

 

[etf]

Also, call me an idiot, but what are the minute differences of a 403b and 401k? I have only had experiences with 401k's and I don't see much difference in either of them ...

there is no difference - they are exactly the same account. 401k is for "for-profit" entities like kaiser-permanente, whearas 403(b) is for non-profits such as UCSF.