**TAX-DEFERRED INVESTMENTS ARE THE BEST OF ALL**

If you are in a tax bracket b, and invest $1 in a taxable investment at a growth rate of i for N years, you will have

$ (1 + i(1-b))^N . (Eq. 7)

If you can defer taxes until the end of the N years, you will have

$ 1 + ( (1 + i)^N - 1 ) * (1-b) (Eq. 8)

The following tables show the ratio of the tax-deferred investment to the taxable investment for several cases:

b | |||

i | .28 | .35 | .39 |

.05 | 1.02 | 1.02 | 1.02 |

.10 | 1.07 | 1.08 | 1.09 |

.15 | 1.14 | 1.18 | 1.19 |

b | |||

i | .28 | .35 | .39 |

.05 | 1.08 | 1.09 | 1.10 |

.10 | 1.28 | 1.34 | 1.38 |

.15 | 1.55 | 1.71 | 1.80 |

b | |||

i | .28 | .35 | .39 |

.05 | 1.17 | 1.21 | 1.23 |

.10 | 1.60 | 1.77 | 1.87 |

.15 | 2.21 | 2.66 | 2.95 |

It should now be clear that tax-deferred investments are highly prized creatures.

JPL/CIT has a tax-deferred plan called a "403-b tax-deferred
annuity", or TDA, which does not have to be an annuity!
You are allowed to put up to around $10,000 / year (minus other
tax-deferred money) into such a plan. This is an even better
deal than stated above, because your __salary__ is reduced
by your contributions, allowing your contributions themselves
to be tax-deferred from both federal and state income tax!

In this case, equation 8 becomes

$ (1/(1-b)) * (1 + i)^N * (1-b) = $ (1 + i)^N (Eq. 9)

since for every $1 invested on an after-tax basis you can invest $1 / (1-b) on a before-tax basis.

This situation produces the following tables:

b | |||

i | .28 | .35 | .39 |

.05 | 1.14 | 1.18 | 1.21 |

.10 | 1.29 | 1.38 | 1.43 |

.15 | 1.45 | 1.60 | 1.69 |

b | |||

i | .28 | .35 | .39 |

.05 | 1.31 | 1.40 | 1.45 |

.10 | 1.67 | 1.91 | 2.06 |

.15 | 2.10 | 2.55 | 2.84 |

b | |||

i | .28 | .35 | .39 |

.05 | 1.50 | 1.66 | 1.75 |

.10 | 2.17 | 2.64 | 2.95 |

.15 | 3.05 | 4.06 | 4.79 |

So this is even better than the highly prized plain old tax-deferred investments!

**CONCLUSION - PUT ALL THE MONEY YOU CAN INTO THE JPL/CIT 403-B
PLAN.**

However, note that there are withdrawal restrictions on such money. The 403-b plan is meant as a means to save money toward your retirement. Therefore, withdrawals before your retirement are restricted, and there is a 10% penalty for any withdrawals, just like for an IRA. However, you can still come out ahead even if you have to withdraw your money earlier and pay the 10% penalty for withdrawal before age 59.5. In general, after about 5 years, you are ahead to put the money into the 403-b even if you have to pay the penalty. To get the exact number, multiply the values in Tables 6-8 by 0.90. However, Congress keeps playing with the rules for being able to withdraw your money before retirement. It is therefore probably best NOT to save toward buying a house or a college education through the 403-b.

Previous Page (Investing - Investing Time Horizon) : Next Page (Investing -Historical Return)

Table of Contents

Glossary

Tom's homepage

e-mail: Tom Chester