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Like many academics in the US, I participate in a 403(b) tax-deferred retirement plan with TIAA-CREF. The college where I work contributes an amount equal to a certain % of my salary, and I conribute my own money through payroll deductions (currently about 20% of my gross salary), which reduces my current taxable income (what the IRS calls elective deferrals). When I take money out of the plan after I retire, I'll have to pay taxes on it then. This is pretty much like the 401(k) plans that more people are familiar with.
I'm in my mid 50s, about 10 years away from retirement, and I'm considering maxing out my elective deferrals. The basic limit is $16500 per year, but because I'm over 50, I'm eligible to make an additional "age 50 catch-up contribution" of up to $5500, for a total of $22000 per year.
Increasing my elective deferrals to this amount would reduce my take-home pay to what I would normally consider an uncomfortably low level, even when spread out over an entire year, and taking into account the reduced income tax withholding. In fact, for this year, since I have only four paychecks left to do it with, it would reduce my take-home pay for the rest of this year almost to zero!
However, I do have a recently-inherited chunk of money which is now sitting around in bank CDs because I've been afraid to do anything else with it. When the next one comes due for renewal shortly (at probably around 0.5% ), I could set aside some of the cash to live off for the rest of the year, and plow most of my remaining paychecks into the 403(b). In the following years I can dip into the CDs at a smaller rate. I could do this until I retire, and still have enough of that money left over to invest in other ways (I've been looking into mutual funds lately, because of the aformentioned CD that's coming due).
So, what do you all think? One of the big selling points of tax-deferred retirement plans like 401(k)s and 403(b)s is that if your income tax rate in retirement is lower than while you're working (and contributing to the plan), you come out ahead on taxes. However, I wouldn't be too surprised to see income tax rates increase before I retire, or at least during my retirement. Maybe I should leave my "extra" money out of the 403(b) and focus on more "standard" investments.
And then there's the question of how well I'd be able to do investing the money on my own versus TIAA-CREF, which is probably somewhat conservative in its strategy.
Is there anything else I should be taking into account?
(Please, no PMs about great deals on bridges or underwater real estate! )
I'm in my mid 50s, about 10 years away from retirement, and I'm considering maxing out my elective deferrals. The basic limit is $16500 per year, but because I'm over 50, I'm eligible to make an additional "age 50 catch-up contribution" of up to $5500, for a total of $22000 per year.
Increasing my elective deferrals to this amount would reduce my take-home pay to what I would normally consider an uncomfortably low level, even when spread out over an entire year, and taking into account the reduced income tax withholding. In fact, for this year, since I have only four paychecks left to do it with, it would reduce my take-home pay for the rest of this year almost to zero!
However, I do have a recently-inherited chunk of money which is now sitting around in bank CDs because I've been afraid to do anything else with it. When the next one comes due for renewal shortly (at probably around 0.5% ), I could set aside some of the cash to live off for the rest of the year, and plow most of my remaining paychecks into the 403(b). In the following years I can dip into the CDs at a smaller rate. I could do this until I retire, and still have enough of that money left over to invest in other ways (I've been looking into mutual funds lately, because of the aformentioned CD that's coming due).
So, what do you all think? One of the big selling points of tax-deferred retirement plans like 401(k)s and 403(b)s is that if your income tax rate in retirement is lower than while you're working (and contributing to the plan), you come out ahead on taxes. However, I wouldn't be too surprised to see income tax rates increase before I retire, or at least during my retirement. Maybe I should leave my "extra" money out of the 403(b) and focus on more "standard" investments.
And then there's the question of how well I'd be able to do investing the money on my own versus TIAA-CREF, which is probably somewhat conservative in its strategy.
Is there anything else I should be taking into account?
(Please, no PMs about great deals on bridges or underwater real estate! )