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Tax-sheltered savings is a term that means a person is saving money on a pre-tax basis. In other words, payment of income taxes on any amount you contribute to a tax-sheltered account will be delayed until a later date.
The advantages to tax-sheltered savings are:
- Any amount you contribute to tax-shelter savings this year will reduce the tax you owe when you file your income tax in April. Therefore, there are tax incentives to participate.
- In a tax-sheltered plan, you don't pay income tax on your investment earnings until those earnings are withdrawn after you retire. Since money in your tax-sheltered account is to be invested to generate more income, a tax-sheltered investment will grow much faster than one which is not sheltered.
Putting money aside in a tax-sheltered investment account is smart not only for tax investment reasons, but for another very important reason: You will create options for yourself as you approach the end of your working career. Teachers who have worked to create substantial tax-sheltered investment accounts will have another source of income to rely on as they consider when to retire or how to afford the pursuit of other interests.
The charts below show how saving a modest amount of money each period in your 403(b) will achieve those kinds of results. Each chart shows the value in the account every five years and assumes the following:
- The teacher begins teaching at age 25
- Pay increases by 3 percent per year
- The teacher saves 3 percent (chart 1) or 7 percent of pay (chart 2)
- The teacher works 35 years
- A rate of return of either 10 or 12 percent
Chart 1
Save 3% of Pay Each Year
| Age |
Salary |
Amount Saved per Year/Check |
Your Balance
|
| If you earn 10% annually |
If you earn 12% annually |
| 25 |
$25,000 |
$750 / $29 |
$787 |
$795 |
| 30 |
$28,982 |
$869 / $33 |
$6,496 |
$6,887 |
| 35 |
$33,598 |
$1,008 / $39 |
$16,524 |
$18,499 |
| 40 |
$38,949 |
$1,168 / $45 |
$33,640 |
$39,976 |
| 45 |
$45,153 |
$1,355 / $52 |
$62,324 |
$79,001 |
| 50 |
$52,344 |
$1,570 / $60 |
$109,817 |
$149,137 |
| 55 |
$60,682, |
$1,820 / $70 |
$187,810 |
$274,319 |
| 60 |
$70,347 |
$2,110 / $81 |
$315,162 |
$496,760 |
*Salary is calculated with a 3 percent annual increase
Chart 2
Save 7% of Pay Each Year
| Age |
Salary |
Amount Saved per Year/Check |
Your Balance
|
| If you earn 10% annually |
If you earn 12% annually |
| 25 |
$25,000 |
$1,750 / $67 |
$1,837 |
$1,855 |
| 30 |
$28,982 |
$2,029 / $78 |
$15,159 |
$16,071 |
| 35 |
$33,598 |
$2,352 / $90 |
$38,558 |
$43,166 |
| 40 |
$38,949 |
$2,726 / $105 |
$78,494 |
$93,279 |
| 45 |
$45,153 |
$3,161 / $122 |
$145,423 |
$184,336 |
| 50 |
$52,344 |
$2,334 / $141 |
$256,241 |
$347,987 |
| 55 |
$60,682, |
$4,248 / $163 |
$438,224 |
$640,078 |
| 60 |
$70,347 |
$4,924 / $189 |
$735,378 |
$1,159,113 |
*Salary is calculated with a 3 percent annual increase
These examples are for illustration only. Other factors could change the value of your account.
These charts are for general information and educational purposes only. The information provided should not be construed as legal or tax advice. Please consult with your legal or financial advisor to determine the appropriateness of this information for your particular circumstances. TRS and NCTR assume no responsibility or liability for the accuracy of the information provided.
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