FAQ – 403(b)/457 Costs and Surrender fees

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A teacher is complaining about the huge tax taken from her 403b on retirement. Why is CTA for 403b?

CTA promotes saving for retirement to supplement CalSTRS and CalPERS. CalSTRS now estimates it will replace only about 56% of a covered member’s pre-retirement income. Since most financial experts recommend that you’ll need at least 80% of your pre-retirement income (some suggest 100% due to increased longevity and higher health care costs as we age), it is important to consider using voluntary savings to fill the gap. Educators can save for retirement using tax-deferred vehicles such as 403(b) or 457 plans or use after-tax vehicles such as Roth plans.

It is true that ordinary income taxes are due when you withdraw money from a 403(b) at retirement. However, that should not deter anyone from participating in a 403(b) plan, which is a convenient and tax-advantaged way to save for retirement and supplement a pension. There are two major tax benefits to a 403(b) plan: 1) When you contribute to the plan, the money is deducted from your paycheck on a pre-tax basis. That lowers your current tax bill. 2) While you are accumulating money in your 403(b) during your working years, the contributions and earnings compound on a tax-deferred basis. In a taxable account, you would likely have to pay taxes on any earnings in the account each year. Instead, with a tax-deferred account, any positive investment returns remain in the account to potentially earn more returns.

In addition, you may be in a lower tax bracket once you retire since you are no longer earning a steady paycheck. If that’s the case, you may pay a lower tax rate on your 403(b) plan distributions than you would have paid on the money while you were working.

To learn more about the benefits of a 403(b) plan, read “Tax Benefits of a 403(b) or 457 Plan” and watch the video “Why Participate in a 403(b) or 457 Plan?
Or for more information on Roth plans, click here

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