Jump to content
Sign in to follow this  
nico

Should We Continue To Contribute To A 403(b) Plan?

Recommended Posts

My wife is a teacher who has been contributing to a 403b plan since the day she started four years ago. Fortunately for her, her plan is with the Vanguard Group and the fees are very low. We raise the question as to whether she should continue to contribute to her plan because of the new change in the tax law which lowered the capital gains rate to 15%. With that said, I have heard alot of financial people on television and on the radio state that 401k's, 403b's and even 529 plans have lost some of their advantages and aren't as attractive as they once were and advised that in some cases, an investor is better off investing in a taxable account through an index fund so that the money is not taxed at ordinary income tax rates and does not have alot of restrictions such as age, specific uses for the money such as education. Thereby giving investors more freedom and flexibility on how and when they want to spend their money. What they have not addressed is the benefit of investing money on a pre tax basis which reduces that investor's taxable income by the amount that he or she has invested in the plan. In our case, my wife puts the maximum in which this year amounts to $12,000.00. Had we not sheltered that money, our tax bill would have been higher. Isn't this still a good reason to invest in a 401k or 403b ? We also max out our Roth Ira's in addition to her 403b plan. Thank you for your responses it is greatly appreciated...

Share this post


Link to post
Share on other sites
Guest Chuck Yanikoski

The income-tax reduction for dividends is, under current law, a very temporary phenomenon. Unless you are cashing out in the next year or two, it won't do you any good.

 

The presumption when this law passed -- and some people still hold to it -- is that OF COURSE this provision will be made permanent. At this stage, I personally would consider this to be a very dubious assumption. Projected federal budget deficits are growing by tens of billions of dollars almost by the day. Even died-in-the-wool Republicans (some of them, anyway) are getting really nervous about this, both for fear of political fallout and because they really don't want to cause a completely insoluble problem for future generations. My own guess is that over the next few years, even if Republicans stay in power, we are more likely to see tax cuts rolled back (to some degree) than to see them extended. Of course, 20 people will read the political situation 20 different ways, but that just emphasizes the real point here: don't ever place too big of a bet on getting a favorable change in the tax law, whatever your definition of "favorable" might be.

 

By the same logic, though, it is just as smart to diversify your tax strategies as it is to diversify your investment holdings. If you are already making substantial contributions to a 403(b) or similar account, then you should consider contributing to a Roth IRA, if you are eligible -- and it might even be smart to reduce your 403(b) contributions if that is the only way you can afford the Roth. This will increase your taxes in the short run, but that money will never be taxed again (unless Congress rewrites the rules -- not an impossibility!). Starting in 2006, under current tax law, most 403(b) participants will be able to put money into a Roth-type 403(b) account (or to split their contributions between the two kinds of accounts), but in the meantime, a Roth IRA is the only way to get Roth-type tax treatment (unless you count cash value life insurance, which is taxed very much the same way, but is not a good idea unless you really need more insurance).

 

By the way, none of this is meant to suggest that anyone should invest all of his/her money in tax-advantaged accounts. It is true that there are significant restrictions on access to such money (less so with Roth accounts), and the younger you are the more likely it is that Something Will Come Up sometime. So it is always smart to have money invested in mutual funds or other places where you can get at it quickly and without penalty. But the current taxation of dividends has nothing to do with it.

 

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

×
×
  • Create New...