# Financial Advice for my Son

## Investing

### Tax-Deferred Investments

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.

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