403(b) & 457(b)

Depending on how much you end up earning as a CRNA, you’ll typically be in the 28% or 33% tax bracket. If you’re higher than that, then my hats off to your fine sir or madam because you’re a high roller. Clearly, you must be running your own private practice.

In any case, when you’re in this income bracket, there aren’t a lot of deductions you can take that’ll help you minimize your tax liability. One of the few is your retirement fund. Lucky for me, I work for a public institution that offers two retirement vehicles for me to invest my money: a 403(b) and 457(b).

The idea behind putting money into these vehicles is simple: to save for retirement. The added bonus to contributing to my 403(b) and 457(b) is that it’ll lower my gross income as the contributions are considered pre-tax contributions; thereby lowering my tax liability.

Some of you may be working for a company that only offers a 401(k) with a matching contribution. So, how you do make sense of all these numbers and letters? Click here for a tutorial on understanding the difference between a 401(k), 403(b), and 457(b).

Basically, a 401(k), 403(b), 457(b) and Roth 401(k) are investment saving vehicles for your retirement. While a gross generalization, but just to give you an idea as to how retirement vehicles are dispersed within the labor market, public employees are generally offered a 403(b) and 457(b), while those who work within a corporate structure are offered a 401(k) or Roth 401(k). There are certain rules surrounding when one can begin withdrawing money from these accounts, but we won’t get into it here. For now, the important thing to know is that they’re investment vehicles that you can funnel money into to save for your retirement.

The advantage to having a tax sheltered account is because well, they shelter your income from being taxed by the government. For example, the average CRNA salary in the U.S. is ~$160,000. If you didn’t contribute to any of the retirement accounts offered to you, you’d have to pay taxes on the $160,000 income you received. However, if you had contributed $18,000 to any one of those retirement accounts, you would only be liable to pay taxes on an income of $148,000. The government considers your contributions to a retirement investment vehicle as a pre-tax contribution. In other words, you don’t have to pay any taxes on the amount you decide to store in your retirement.

The great thing about this is that you can make annual pre-tax contributions to your retirement account/s until well, you retire. However, the caveat is, when you retire and the day you withdraw money from these retirement accounts, you will have to pay taxes on those accounts at that time.

For 2015-2016, the IRS states that the maximum contribution to the Roth 401(k), 401(k), 403(b) and 457(b) is $18,000. Because my employer offers both the 403(b) and 457(b), I am able to sock away a total of $36,000 should I decide to max out my contributions (which I did).

Let’s run the simple math:

My Gross Income for 2015: ~$190,000
403(b) Contributions: $18,000
457(b) Contributions: $18,000
My Taxable Income: $154,000

Continuing on with the math, if I include my compulsory contribution to my pension, which is 7% of my gross income (0.07*$179K I made as a W2) = ~$12,500.

My Gross Income for 2015: ~$190,000
403(b) Contributions: $18,000
457(b) Contributions: $18,000
7% of Gross Income ($179K) with my W2: $12,500

2015 Taxable Income: $141,500

Not bad, right? I went from a 33% tax bracket with an income of $190,000 to a 28% tax bracket with an income of $141,500. Disclaimer: Yes, I know that what I just said isn’t entirely accurate, but I’m just illustrating two points: (1) the benefits of contributing to your retirement vehicles and (2) demonstrating how you can decrease your tax liability.

Moral of the story: contribute to your retirement to decrease your tax liability especially since you’re now making 6 figures!!!