Using retirement savings to save on taxes

Key Takeaways:

• It’s never too late to start saving for retirement.
• Contributions to a 403(b) plan are tax deferred, meaning you have less taxable income.
• Compound interest can accelerate your savings goals for retirement.

Do you think about retirement? We’re not talking about sitting on a beach sipping fruity drinks. Everyone thinks about that part, especially in the middle of a long school week or during the month that’s the farthest from summer break. No, we’re talking about the behind-the-scenes planning that makes sitting on said beach sipping said drinks possible: your financial retirement. 

As educators, there’s more than enough going on in the present to think about the future. But retirement planning doesn’t have to be challenging. It can actually be exciting. Especially if you like paying less in taxes. 

Let’s start at the beginning

Does the thought of starting a retirement plan seem daunting? If you get anxious about the topic, you aren’t alone. According to a recent U.S. Census report, 50% of women and 47% of men between the ages of 55 and 66 in the United States have NO retirement savings. That means millions of Americans are nearing retirement age with no plan and no money. Based on those numbers, starting a retirement account at any point in your journey is better than not starting at all. Fortunately, there are a few simple steps you can take today so you are more prepared for tomorrow. 

Let’s talk taxes

If you don’t know where to start or where to find the money to get started, there’s good news. Retirement savings options, such as 403(b) plans for educators, as well as individual retirement accounts (IRAs), allow you to contribute to a plan with pre-tax dollars. These plans can be a smart way to save because you can lower your taxable income at the same time.

You read that right. Not only can a 403(b) help you save money for retirement, but it can also help you save on your current income taxes. That means you can keep more of your money and save for retirement at the same time, just by contributing to your retirement plan.

Let’s look at the numbers¹:

• Someone makes $50,000 a year and contributes $5,000 (or 10% of their pay) to their retirement plan.
• That $5,000 is a pre-tax contribution, which takes $5,000 off of their taxable income. 
• Their taxable income is now $45,000 instead of $50,000.
• After taxes, they have an additional $1,250 to pocket or, better yet, reinvest in their retirement account.

Let’s look to the future

Remember, all your contributions and investment income won’t be taxable until the money is distributed to you in retirement. We can’t predict future tax rates, but you may be in a lower tax bracket when you retire. That means the tax rate on your withdrawals could be lower than the rate that would apply to taxable income during your working years.

Let’s add interest

Any amount of money you can start with is a good start. That’s because even a slow, steady investment in your future can get bigger thanks to compound interest. Compound interest is when the interest you earn on a balance in an investing account is reinvested, earning you more interest. 

Or, as Benjamin Franklin once said, “Money makes money. And the money that money makes, makes money.”

Compound interest may accelerate the growth of your savings and investments over time. 

Let’s plan how you want to retire

The financial professionals at Equitable Advisors love to help teachers reach their retirement goals. We invite you to get started today by discussing how to put a plan in place with an Equitable Advisors trusted local financial professional. They can help you take the right steps towards retirement investing and discuss the long-term tax advantages of a 403(b) savings plan. 

Disclosures:

¹ This hypothetical example takes into account only federal income taxes and does not consider state or local taxes or other payroll adjustments. Withdrawals made prior to age 59½ may be subject to a 10% federal income tax penalty and are subject to plan restrictions. Example assumes that all income is taxed at an average rate of 25%, whereas federal tax rates increase gradually as taxable income rises over specified levels.

Equitable believes that education is a key step toward addressing your financial goals, and this discussion serves simply as an informational and educational resource. It does not constitute investment advice, nor does it make a direct or indirect recommendation of any particular product or of the appropriateness of any particular investment-related option. Your unique needs, goals and circumstances require the individualized attention of your financial professional. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.

Please be advised that this document is not intended as legal or tax advice.  Accordingly, any tax information provided in this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.  The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed and you should seek advice based on your particular circumstance from an independent tax advisor.

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Equitable Financial Life Insurance Company (New York, NY) issues life insurance and annuity products. Securities offered through Equitable Advisors, LLC, member FINRA, SIPC. Equitable Financial Life Insurance Company and Equitable Advisors are affiliated and do not provide tax or legal advice.