In my previous post Investing for Retirement - The Future Proof Way, I spoke of my personal preferences for not investing in my employer's sponsored 403(b) plan:
Unfortunately while my employer does offer a 403(b) plan for employees and matches up to 4% income in contributions, there is a 5-year vesting period which means if you leave the system before 5 years, all employer matching contributions and earnings are forfeited. Guess how long a radiology residency is? (Hint: it's 4 years).
I've had a change of heart and decided to enroll in the 403(b) and here is why...
Brief Review of the 403(b): A 403(b) plan is a tax-deferred retirement plan for employees of non-profit organizations. You may be familiar with a 401(k) plan if you work for a private corporation or a 457 if you work for the government. They are essentially the same. A 403(b) offers you the ability to put money away into a special account without paying any income tax on it. For more details, see my previous post The ABCs of Retirement Plans.
Traditional vs. Roth: My employer offers 2 types of 403(b) plans - both a traditional and a Roth version.
- Traditional - you can put up to $18,000 away each year and deduct that amount from your taxable income. For example, if your taxable income was $58,000 for the year and you put $18,000 in a traditional 403(b), the income that you owe taxes on is $58,000 - $18,000 = $40,000. If your income is taxed at the 25% rate, this would mean you save $18,000 x 25% = $4,500 in taxes that year.
- Roth - you can put up to the same $18,000 away each year however you cannot deduct that amount when you file for taxes. But whatever that $18,000 grows to in the 403(b) plan in the future is un-taxed. In the above example, you would still owe income tax on all of the $58,000 made. But say you are very good with investing and that $18,000 becomes $180,000 by the time you retire, NONE of that $180,000 is taxed!
My change of heart: I initially did not want to participate in my employer's 403(b) plan for the following reasons
- I would not benefit from matching employer contributions as I will leave the system before the 5-year vesting period
- Even if I put the max allowable $18,000/year into the account, it would not reduce my income to the next lower tax bracket - hence I would not get any real tax savings percentage wise.
However, I failed to consider the tax-free growth if I participated in a Roth 403(b). Even without the employer-match, being able to put $18,000/year away in residency would still result in substantial savings when that money can grow entirely tax free. As of today, I am officially following every step outlined in the post A Simple Step-wise Approach to Retirement Savings.