A Change of Heart - Future Proof Investing Update

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

2015 Individual tax brackets (Source: FORBES)

  1. I would not benefit from matching employer contributions as I will leave the system before the 5-year vesting period
  2. 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.



Future Proof, MD

Dr. Bo Liu is an aspiring radiologist-in-training and the founder and editor of the White Coat Money Blog.  He has an interest in interventional radiology and helping his medical colleagues get ahead in this mad world of medicine and money.  When he's not crushing the list at the PACS station or typing up your next favorite blog post, you can usually find him at the local badminton club, movie theater or the most recently opened restaurant.