Saving with a 403(b) or 457 Plan

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It's is a good time to remember that you can take steps to help lower your tax bill next year – participate in and save more in your 403(b) or 457 voluntary retirement plan.

Your 403(b) or 457 plan helps you save on taxes two ways – pre-tax contributions and tax-deferred earnings.

Pre-tax contributions. The money you contribute to your 403(b) or 457 plan is subtracted from your paycheck before federal and state income taxes are deducted. So the reduction in your paycheck is less than the amount that goes into your plan.

Here's an example: Suppose your semi-monthly gross pay is $2,100, you are in the 25% federal tax bracket and 8% California income tax bracket, and contribute $100 to your 403(b) or 457 plan. Your take-home pay will actually be only about $67 less.*

Here's how:

  Paycheck with no plan contribution Paycheck with $100 plan contribution
Gross pay $2,100 $2,100
Minus contribution -0$ -$100
Difference $2,100 $2,000
33% federal and state taxes -$693 -$660
Net pay $1,407 $1,340

$100 in plan, but pay is only $67 less!

Tax-deferred savings.  In a 403(b) or 457 account, any earnings in the account – such as interest, dividends and capital appreciation (increase in price of the investment) – remain in the account until you begin withdrawing money when you retire.** That means your money can accumulate faster than a taxable account earning the same annual rate of return, because the earnings aren't reduced by taxes each year. Instead, the earnings remain in the account to continue compounding.

Help Fill the Gap

Not only does your 403(b) or 457 plan provide unique tax advantages, it can help you fill the gap between your expected CalSTRS or CalPERS pension benefit and the income you will need to live a financially secure, dignified retirement. To estimate your retirement income needs, expenses and savings, take advantage of the helpful calculators available at the free financial education site provided by CTA,

* This is a simplified example that does not take into account other pay deductions.

** Taxes will be due upon withdrawal at ordinary income tax rates. Premature withdrawals may be subject to a 10% tax penalty (does not apply to 457 plans).