Emily and Kent both earn $2000 per month, and both save $200 each month towards their retirement. However, Emily has the opportunity to invest in a §403(b) plan while Kent's retirement contributions are made to an after-tax savings program.

Since Kent's investments are not tax-deferred, he will have $2000 of taxable income for the month. Under a 25% federal tax rate and a 5% state tax rate, approximately $500 would go to the federal government, $100 would be withheld for state taxes and FICA would be about another $153. As Kent is saving $200 a month for retirement, he would be left with $1,047 in spendable income.

Since Emily contributes $200 to a §403(b) retirement savings plan, her taxable income is only $1800. As such, her taxes will be less than Kent's with about $450 going to the federal government, $90 withheld for the state and FICA remaining at $153. Since Emily has reduced her taxable income by contributing to her §403(b), her spendable income is $1,107.

As you can see, even though Emily and Kent are each saving the same amount for retirement, Emily is able to take home $60 more dollars per pay period because she is investing on a pre-tax basis in her §403(b) account.


Amounts withdrawn from a §403(b) account are included in taxable ordinary income in the year distributed. Distributions prior to age 59½ may be subject to a 10% IRS penalty.