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Subject:  403(b) tax advantage - Is it really worth it? Date:  5/7/2002  12:57 PM
Author:  Mudster1 Number:  34470 of 97960

As we all know, contributions to 403(b) accounts are deducted pre-tax. This is supposed to result in savings over the long run, but does it?
I think there are some monetary repercussions of pre-tax deductions that are ignored in discussions of retirement planning.
When your money comes out pre-tax, your federal adjusted gross income is lower. However, your average annual salary is also lower. Your contributions to social security are lower. If you participate in a state pension plan (such as KPERS here in KS), and you probably do participate in such a plan if you are eligible for a 403(b), then your average annual salary is also going to be lower.
What does this mean? It means that, when you retire, the amount that you receive from your pension and from social security will be significantly less than they would be if you made your retirement contributions after tax.
I don't have time right now to try to calculate whether or not this difference is greater than the tax advantage earned by pre-tax deduction (and I suspect I lack enough info. and math skills!). However, I think that the old rule of thumb assumptions about annual returns on investments are now inflated. I don't think we will see 12% returns over the next decade on index funds for example, maybe not even 8%. Assuming that we actually receive social security and state pension checks, I think that the potential additional payout from a higher average salary could be significant. If one participates in annuity plans and makes contributions pre-tax, I think one should at least consider the lost future income that results when calculating the pre-tax savings that is said to be so advantageous.
If lawmakers really wanted to help public employees, they would
report gross earnings as average salaries for employees participating in 403(b) and state pension plans. When I look at my state pension plan statement, it appears that they use adjusted earnings that reflect the deductions made pre-tax (and perhaps even the contributions to the state pension plan that are not federally taxed).

I have not worked all this out, but I think it is worth looking into!
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