The Benefits of Investing in a §403(b)
A §403(b) is a tax-advantaged retirement program for employees of hospitals, educational institutions, and certain other not-for-profit organizations. 403(b) plans provide an outstanding means to maximize retirement savings. Investors may fund their accounts with pre-tax payroll deductions and both contributions and earnings are treated as tax-deferred until withdrawal.
§403(b) Plan Participants Enjoy These Benefits:
Pre-tax Savings — Participants who defer compensation into a §403(b) account realize immediate tax savings on their contributions. Before any taxes are taken out, your paycheck is reduced by the amount you decide to invest. Therefore your total taxable income is less.
Tax-deferred Growth Potential — Taxes on your investment earnings are also deferred. You needn't pay taxes on anything that your deferred compensation earns until you retire. For many people, that time is years away, allowing for long-term investment growth. Withdrawals are taxed as ordinary income, but many retirees find themselves in a lower tax bracket than when they were working. [A 10% penalty may apply for early withdrawal—before age 59 1/2 unless taking advantage of a 72(t) distribution. See your Legend advisor for details.]
Convenient Payroll Deduction with Built-in Dollar Cost Averaging — Investing in a §403(b) plan couldn't be simpler. You may decide to defer a certain percentage of your compensation each pay period to be invested in your §403(b) account. As this amount is automatically deducted from your paycheck at regular intervals, dollar cost averaging is built in to your investment plan. With dollar cost averaging, you buy more shares when prices are low and fewer when prices are high. Over time, the average amount paid (average cost) for each share will usually be less than the average price per share. This strategy also eliminates the need to decide when is the best time to buy. [Dollar cost averaging does not assure a profit and does not protect against a loss in declining markets. Investors should consider their ability to purchase shares continuously during periods of falling share prices.]
Optional Employer Contributions — Your employer may elect to match a certain percentage of your §403(b) plan contributions. This participation incentive is money you receive above and beyond your regular salary. In fact, employer matching is like getting an instant raise.
Choice and Portability — Many investment options are available for §403(b) plans, including fixed annuities, variable annuities and mutual funds. This variety enables you to design a customized plan that suits your time horizon, risk tolerance and investment objectives. Also, your §403(b) account is portable. If you should leave your job, your account can be transferred into another employer's §403(b) program or an IRA.
Dynamic Asset Management — Most §403(b) plan participants have access to professionally managed investment portfolios, with either insurance or mutual fund companies. In addition, Legend Advisory Corporation offers five diversified asset allocation portfolios through the Strategic Asset Management® program. The portfolios are managed by a team of experienced investment professionals who monitor world markets in an effort to maximize returns and reduce risk.
Loan provision — Loans are available from most §403(b) plans. Under Legend's loan program, both principal and interest are paid back to your account via automatic payroll deduction. This means if you meet your payment schedule on time, the loan is free!**
Distributions — §403(b) account assets can be withdrawn without penalty after age 59 1/2, even if you are still employed. Upon withdrawal, ordinary income taxes will apply. Distributions must begin no later than April 1 of the calendar year following the calendar year in which you attain age 70 1/2, unless you are still working. §403(b) plan participants who have terminated employment under the age of 59 1/2 may begin distributions through an IRS provision known as a §72(t) distribution. See your Legend advisor for details.
The Power of Pre-Tax Contributions
Emily and Kent both earn $2000 per month, and both save $200 each month towards their retirement. However, Emily has the opportunity to invest in a 403(b) plan while Kent's retirement contributions are made to an after-tax savings program.
Since Kent's investments are not tax-deferred, he will have $2000 of taxable income for the month. Under current income tax rates, approximately $540 would go to the federal government, $100 would be withheld for state taxes and FICA would be about another $153. As Kent is saving $200 a month for retirement, he would be left with $1007 in spendable income.
Since Emily contributes $200 to a §403(b) retirement savings plan, her taxable income is only $1800. As such, her taxes will be less than Kent's with about $486 going to the federal government, $90 withheld for the state and FICA remaining at $153. Since Emily has reduced her taxable income by contributing to her §403(b), her spendable income is $1071. As you can see, even though Emily and Kent are each saving the same amount for retirement, Emily is able to take home $64 more dollars per pay period because she is investing on a pre-tax basis in her §403(b) account.
The Power of Tax-deferred Compounding
In this hypothetical illustration, we'll analyze the scenario for a monthly contribution of $250 into a 403(b) plan that is earning 8% versus the same monthly contribution and earnings rate in a taxable investment with a 27% tax rate.
This hypothetical example is not intended to illustrate the performance of an actual investment. This illustration is not an indication or guarantee of future performance. The illustration is a hypothetical analysis that is calculated using a single compounded rate of return, which is highly unlikely as rates will vary over time, particularly for long term investments. This illustration does not take into consideration any fees or expenses, which would lower performance.
A taxpayer saving in a taxable investment would first have to pay tax on the $250 earmarked for saving, netting only $182.50 for deposit each month. In 10 years, the taxable investment would have grown to $29,794 while the §403(b) investment would be at $33,610, net after taxes— a difference of $3,816. The difference is that in the taxable investment, taxes were paid on all of the gains, thus reducing the amount saved. With the 403(b) plan, the entire investment was permitted to grow tax-deferred.
Over a period of 30 years, the difference is even more dramatic. Here the taxable investment grows to just $178,678 while the tax-deferred investment grows to $273,804, net after taxes. The difference is a whopping $95,126!
All the funds that were paid out from the taxable investment to cover the taxes were allowed to remain in the tax-deferred §403(b)investment to compound over all those years. With a §403(b) account, those funds were working for the investor throughout that entire period of time. And while §403(b) assets are subject to taxes upon withdrawal, investors often find themselves in a lower tax bracket at retirement than when they were working. This means the amount paid in taxes should be less.
Securities offered through Legend Equities Corporation, member FINRA and SIPC
4600 East Park Dr., Suite 300 • Palm Beach Gardens, FL 33410 (561) 694-0110 • www.legendgroup.com
Advisory services offered through Legend Advisory Corporation, a registered investment advisor.
Before investing in a mutual fund, consider its investment objectives, risks, charges and expenses. The prospectus contains this and other information about the mutual fund and can be obtained by contacting Legend Equities Corporation. Please read the prospectus carefully before you invest or send money.
*A 10% penalty may apply for early withdrawal—before age 59 1/2.
**Defaulting on a loan from a retirement plan constitutes a distribution from that plan. Distributions from a retirement plan are subject to federal income tax and may incur an additional 10% penalty if the participant is less than 59 1/2.
Copyright 2002 The Legend Group, Inc. All rights reserved.