Save More, But Spend The Same
Illustration: Suppose you are in the 24% Federal tax bracket, meaning that you pay 24 cents of each additional dollar you earn in Federal taxes (this is called your marginal Federal tax rate). Suppose also that you are in the 9% Oregon income tax bracket and you determine that you could save $100.00 after taxes each month and still meet all of your financial obligations. Then, you could contribute $149.25 to a tax-deferred savings plan plan each month and reduce your spendable income by only $100.00. Hence, the effect is that you are saving more, but spending the same, by taking advantage of your employer's 403(b) program.
Additional Illustrations
The tables on the right gives similar illustrations with different marginal Federal tax rates. In all of these illustrations, it is assumed that your income is subject to a 9% Oregon marginal income tax rate, which means that you pay 9 cents of each additional dollar you earn in Oregon income taxes. For those interested in the mathematics involved, the Federal marginal tax rate is added to the State marginal tax rate to obtain an overall marginal tax rate (MTR, expressed as a decimal). Then, the pre-tax amount you may save is obtained by dividing $100 by (1 - MTR). Applying this to the illustration in the above paragraph, MTR = .24 + .09 = .33 and the pre-tax savings amount is determined by the formula $100/(1 - .33) = $149.25. Of course, actual Federal and State withholding amounts depend on your marital status, exemptions, and other information you provide your employer on your W-4 Form, but when tax filing time comes around your net reduction in after-tax income will, in fact, be only $100.00. And, earnings on the $149.25 you invested will accrue on a tax-deferred basis from now until retirement.
Contribution Limits
For information in the current contribution limits that apply to 403(b) and 457(b) Plans, click here.
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| __________________________________________________ |
After-Tax Monthly Contribution Budgeted = $100
State Marginal Income Tax Rate = 9% |
| __________________________________________________ |
Federal
Marginal
Tax Rate |
Equivalent
Pre-Tax
Contribution |
| 10% |
$123.45 |
| 12% |
$126.58 |
| 22% |
$144.93 |
| 24% |
$149.25 |
| 32% |
$169.49 |
| 35% |
$178.57 |
| 37% |
$185.19 |
| __________________________________________________ |
After-Tax Monthly Contribution Budgeted = $500
State Marginal Income Tax Rate = 9% |
| __________________________________________________ |
Federal
Marginal
Tax Rate |
Equivalent
Pre-Tax
Contribution |
| 10% |
$617.28 |
| 12% |
$632.91 |
| 22% |
$724.64 |
| 24% |
$746.27 |
| 32% |
$847.46 |
| 35% |
$892.85 |
| 37% |
$925.93 |
For information concerning Federal rates, please consult the 1040 Instructions available on the IRS's website or consult your tax professional.
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