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If you want to know how to reduce your taxes in 2009 with 403(b) or 457 plans you should first know that you can only participate in 403(b) plans if your employer is qualified or part of state or local government. Qualified employers include a school, church, hospital, university health services clinic, or health and welfare service agency. State and local governments can set up a qualified 457 plan. Ask your employer's employee plan benefits personnel to make sure they sponsor these employee retirement savings plans.
Maximum Elective Deferrals
In 2009, a salary reducing contribution was established. It is widely referred to as an elective deferral; the amount of the deferred option is $16,500. This is for eligible employees who have 403(b) plans with their employers and make no more than $55,500 if married, $41,625 if head of household and no more than $27,750 if single. Also, if you have more than one qualified plan you must combine the amount of contributions. That means that the sum of all your elective deferrals in all your plans can be no greater than $16,500.
15-Year Rule
If you have dedicated 15 years of service to a qualified employer then you are allowed up to $3,000 more in elective deferrals. Therefore, you may be eligible for $19,500 in tax reducing contributions to the plan. The way to determine years of service if part-time is to add up the number of hours, and divide that number by the unit of time which is considered full time. For example, if you work for a university and they dictate that ten months out of the year equates to full time and you worked five months that year, then you gained half a year of service in that calendar year.
Contribution Credits
If you are eligible for elective deferrals chances are you will also be eligible for tax credits on your 403(b) plan. This is under the condition that you or your employer make contributions to a qualified retirement plan including; IRA or Roth IRA, Simple IRA, SEP retirement plan, or a section 403b annuity.
The amount of tax credits available is a non refundable $1,000 for single filers and up to $2,000 for joint filers. This non refundable tax credit will not be the total $1,000 if the total tax liability in the taxable year is less than $1,000. This is contrary to refundable tax credits, such as earned income tax credits which is constant no matter the tax liability in that year. Note that tax credits reduce your tax liability dollar for dollar as opposed to tax deductions, which reduce the taxable salary.
Catch-up Contributions
Certain tax filers who are fifty or older by the end of the year are allowed an additional contribution. It is either $5,500 or the excess income above and over the elective deferrals already assigned; whichever is less. Similar to elective deferrals, catch-up contributions can sum up to no more than $5,500 in all qualified plans.
What are the tax liabilities if I cash in my 403b and pension plan early?
Dealing with the tax liabilities that are associated with cashing in a 403b and pension early can be confusing. When you cash out these retirement accounts, you will have to pay a tax penalty as well as income taxes on the money that you receive. The early distribution penalty for this type of transaction is 10 percent of the value. In addition to that, you will have to pay income taxes on the entire amount. This amount will be based on your marginal tax rate for the year. If you make more money, you will be put into a higher tax bracket.
