How to Increase Your Take Home Pay With 403B

A 403b plan is a tax-sheltered annuity offered to employees of nonprofit organizations. These plans are defined contribution plans, meaning you as the employee must elect to start saving toward retirement. The money you contribute reduces your annual gross income on a dollar-for-dollar basis. As a result, you could lower your tax bracket and increase your take-home pay just by saving toward retirement. An extra bonus may be matching contributions by your employer.

Instructions

1. Calculate your estimated annual income by multiplying your monthly income by 12. For example, if you make $4,000 per month, your estimated annual income is $48,000.

2. Look at the existing tax rates for your annual gross income (see References). The 2010 tax brackets have $48,000 at a 25 percent tax bracket for a head of household. Check with the IRS for annual updates for your tax situation.

3. Calculate how much you need to add to a 403b plan to drop your tax bracket. Based on the 2010 head of household bracket, you need to fall below $45,551 in annual income. Therefore, you need to contribute at least $2,449 over the course of the year to drop your income tax bracket to 15 percent.

4. Divide the amount you need to contribute by the number of months left in the year. Assuming a full year is left, you need to contribute at least $205 dollars per month to reduce your tax bracket.

5. Compare the increase in monthly salary, keeping in mind that payroll taxes remain the same and you need to deduct the contribution to the 403b. Therefore, $4,000 at a 25 percent tax bracket means you take home $3,000 monthly. That same $4,000 at a 15 percent bracket brings home $3,400 less the $205 contributed to the 403b, leaving $3,195.

Tips & Warnings

• You are allowed to contribute up to $16,500 in 403b contributions based on 2010 IRS regulations. All contributions must be earned income.

References

• Money-Zine: 403B
• IRS.gov: 403b Plan Basics
• Bankrate: 2010 Tax Bracket Rates