The 403 (b) and 457(b) plans allow you to set aside a portion of your salary before federal and state income taxes are paid. This deferred salary (before-tax deductions) is placed into an investment account of your choice. Participating in an SRA allows you to delay payment of taxes on the money you invest and any interest that money has earned until later- usually at retirement.
[Your Pay] - [Before-tax Deductions] = Taxable Income
[Taxable Income] – [Income Tax Withholding and Other Deductions] = Spendable Pay
Example: Assuming $100/Month ($1200/year) Savings
|Column 1 Heading||With 403(b)||Without 403(b)|
|Annual Salary (Gross Pay)||$30,000||$30,000|
|Less 403(b) or 457(b) Savings||- $1,200||N/A|
|Less Retirement Contribution (8%)||- $2,400||- $2,400|
|Less Federal Tax*||- $3,960||- $4,140|
|Less Medicare Tax||- $435||- $435|
|Less After Tax Savings||N/A||- $1,200|
|Remaining Spendable Pay||$22,005||$21,825|
*Assumes federal tax bracket of 15%. Savings will be even greater for person in higher tax brackets.
There are two types of annuity contacts: fixed annuities and variable annuities.
The fixed annuities provide a guarantee of principal and a guaranteed rate of return. Fixed annuities also provide for fixed periodic payments at retirement and a specific rate of return for a certain period of time. At retirement, you can select from several payment options, depending on the investment contract or policy you have chosen.
The variable annuities invest mainly in stocks, bonds, and money market funds and do not have a fixed rate of return or a guarantee of principal. The amount of money you receive at retirement or your monthly retirement payments will vary, depending on the investment performance of the fund. This type of investment relies on growth over a period of time to increase the value of the fund. There are no guarantees that your account will grow; the value of your account can go up or down with the investment performance of the fund.
Some of the companies offer a combination of both fixed and variable annuities. You may specify the percent or amount of each deposit that is to be invested in each account.
The custodial accounts available through the mutual fund companies are very similar to the variable annuity option described above.
The value of your account can go up or down with the investment performance of the fund.