Does My 403(b) Reduce My Social Security Benefits?
A 403(b) account is a retirement plan offered to government employees and non-profit employees. A 403(b) plan is a tax-sheltered annuity. This plan provides a way for you to save money in addition to your government pension. Income from this plan won't reduce your Social Security benefits but it is included in the calculation to determine whether your benefits are taxable.
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Significance
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Your Social Security benefits may become taxable if you receive income from sources other than Social Security. One-half of your Social Security is added to all other retirement income. If you file single and your retirement income exceeds $25,000 but not $34,000, then up to 50 percent of your Social Security benefits will be taxed at ordinary income tax rates. If you make more than $34,000, up to 85 percent of your Social Security income will be subject to income taxes. If you file jointly, and you and your spouse's combined income is between $32,000 and $44,000, then up to 50 percent of your benefits are taxable. Anything over $44,000 is subject to taxation at the 85 percent level.
Benefit
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The benefit of a 403(b) plan is that is does not directly reduce your Social Security benefits. This is because 403(b) income is not considered ordinary income. Because of this, benefits won't be reduced from receiving money from your 403(b) plan.
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Disadvantage
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The disadvantage of 403(b) plans is that the distributions from your account are taken into account when calculating how much of your Social Security benefits will be taxable. This means that the 403(b) income you receive indirectly may reduce benefits you receive, even though the income you get from a 403(b) plan doesn't necessarily or directly lower your Social Security benefits.
Consideration
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When you retire, you may completely avoid taxation of your Social Security benefits. If you convert your 403(b) plan benefits to a Roth IRA, you will avoid taxation of your Social Security income. Roth accounts do not reduce your Social Security benefit payment but they are also not counted in the calculation to determine if your Social Security benefits will be taxable.
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