Reason 1: Income Tax Deduction
Contributions to your 403(b) account are tax deductible for federal income abs social security taxes. Putting money into the 403(b) reduces your taxable income for that year. For example, if you put $5,000 into your 403(b) account and your federal income tax rate was 10%, by deferring that income you just saved $500 in federal taxes. Plus, $765.00 is exempt from social security tax.
Reason 2: Deferred Income Tax
You won’t have to pay income tax on you pretax contributions to your 403(b) until after you start taking distributions from your retirement account. This is great for income taxes because you will likely be in a lower tax bracket when you retire, and taxed at a lower rate.
Reason 3: Elective Contributions Avoid Self-Employment Taxes
Churches can make elective contributions to your 403(b) account on top of what you contribute. Many Ministers do not realize that these elective contributions avoid Social Security and Medicare taxes. This is a huge benefit unique to 403(b) plans.
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Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
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