403(b) retirement plans are designed primarily for employees of nonprofit organizations, public schools, and certain religious groups. The tax benefits available to participants are broad and impactful.
Here are some key strategies to optimize your tax savings through a 403(b) retirement plan.
Maximize Pre-Tax Contributions
Contributing part of your gross income to your 403(b) directly through your payroll lowers your overall taxable income for the year. The taxes will only be deducted when the money is withdrawn from the account.
By increasing your pre-tax contributions, you incur lower income tax, allowing your savings to grow. The higher your contributions, the greater your potential tax savings.
Utilize Catch-Up Contributions (For Those 50 and Older)
Individuals who are 50 years of age or older can take advantage of catch-up contributions. In addition to the regular contribution limits, catch-up contributions allow for higher savings, which can be especially useful for those who are nearing retirement. This strategy helps reduce current taxes but accelerates the growth of retirement savings.
By contributing the maximum allowable amount to a 403(b), participants can take full advantage of the tax deferral while building a more substantial retirement nest egg.
Consider a Roth 403(b) Option
Some 403(b) plans offer a Roth 403(b) option, which allows you to contribute after-tax dollars instead of pre-tax contributions. While this doesn’t provide an immediate tax break, the major benefit of a Roth 403(b) is tax-free growth. If you expect to be in a higher tax bracket when you retire, a Roth 403(b) may be a worthwhile choice, as withdrawals in retirement will be tax-free.
If you seek a balance of both immediate tax reduction and tax-free retirement income, a combination of traditional and Roth 403(b) can provide a strategic tax diversification approach.
Take Advantage of Employer Matching Contributions
If your employer offers a matching contribution to your 403(b), make sure to contribute at least enough to get the full match. Employer contributions don’t count against your personal contribution limit, providing a significant boost to your retirement savings at no additional cost to you.
Strategically Plan Withdrawals in Retirement
Once you reach retirement age, the tax treatment of your 403(b) withdrawals becomes important. Withdrawals from a traditional 403(b) are taxed as ordinary income, so the strategy is to withdraw money in years when your tax rate is low. For example, your taxable income could be lower during your early retirement years. This strategy can help reduce the overall tax burden when you start accessing your retirement savings.
If you’re nearing retirement, it’s wise to consult with a financial planner to determine the best withdrawal strategy for minimizing your tax liability.
Ready to reduce your tax burden? At South Star Wealth Management, we’re here to simplify the process, helping you make the most of your retirement savings with a 403(b) plan tailored to your unique financial goals. Schedule a meeting with our experts today!