Retirement Saving Options

Personal, Traditional, and Roth Comparisons

Illustration based on compound interest: Suppose you are in the 20% tax bracket, meaning that you pay 20 cents of each additional dollar you earn in taxes (this is called your marginal marginal tax rate). Suppose also that you determine that you could save $80.00 after taxes each month and still meet all of your financial obligations. Then, you could contribute $80.00 to a personal savings account, or $80.00 to an employer Roth 403(b) or 457(b) plan, or $100.00 to an employer Traditional 403(b) or 457(b) plan and reduce your spendable income by exactly $80.00. When you contribute $100.00 to the Traditional 403(b) or 457(b) plan, your current taxable income is reduced by $100.00, thus reducing the taxes you must currently pay by 20% of $100.00, or $20.00. The net effect is that your current spendable income is only reduced by $80.00.

This Excel Spreadsheet provides analyses of the personal saving, Traditional saving, and Roth saving approaches. The results are comparable to those obtained in the educational tutorials, and they show that both Traditional and Roth approaches are better than personal after-tax savings. Choosing between Traditional and Roth depends on your assumption about marginal tax rate at withdrawal.

Additional Traditional Illustrations

The tables on the right give additional illustrations of Equivalent Traditional (Pre-Tax) Contributions based on an increased $100 (respectively, $500) you could save after taxes each month and still meet all of your financial obligations, with various Federal marginal tax rates combined with a fixed 9% Oregon marginal tax rate. 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 24% Federal Marginal Tax Rate, 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.

Equivalent Pre-Tax Contribution Amounts

In the tables below, the Equivalent Pre-Tax Contribution values represent the amounts you could contribute on a Traditional (Pre-Tax) basis and reduce your current spendable income by only $100 in the first table and by only $500 in the second table.

For information concerning Federal rates, please consult the 1040 Instructions available on the IRS's website or consult your tax professional.