403(b) or Tax-Sheltered Annuities (TSA) Retirement Plans and Investment Options

A 403(b) plan is retirement savings plan available for employees of public educational institutions and specific tax-exempt organizations as determined by Section 501(c)(3) of the IRS Code. These types of institutions include K-12 public schools, colleges, universities, hospitals, libraries, philanthropic organizations and churches. 403(b) plans are also referred to as a tax-sheltered annuity (TSA) although since 1974 they no longer are restricted to annuity investment vehicles and participants can also invest in mutual funds.

403(b) and Roth 403(b)

In the case of traditional 403(b), participants set aside money on a pre-tax basis through a salary reduction agreement with their employer. The money is then directed to a financial institution selected by the employer. Like the 401(k), the money grows tax-deferred until retirement. It is taxed as ordinary income when withdrawn. Unlike traditional pre-tax contributions, Roth 403(b) contributions are made with after-tax dollars. If a participant has the account for at least five years and has turned 59 ½, money from the Roth 403 (b) can be withdrawn tax free. If your employer does not have Roth 403(b) agreements with investment providers, your alternative can be Roth IRA. Strong savers and those with generous retirement benefits may have a sizable retirement income and be subject to sizable taxes. Having Roth savings exempt from taxation would be a boon.

Investment Options

If your employer offers 403(b) plan, typically investment choices are limited to annuities and mutual funds.

• Fixed and Equity Indexed annuities (EIA) are contracts with insurance companies. Variable annuity* is a special type of contract with insurance company. Variable annuity is treated as security while fixed and EIA annuities are treated as insurance products. All annuities have surrender schedule and surrender charges as well as other fees depending on how the product is being structured. If properly structured, annuity contracts may offer guarantees and some other benefits.

• Mutual Funds are investment vehicles that are made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. A mutual fund's portfolio is structured and managed by money managers. Mutual funds are often classified as growth funds, income funds, or balanced funds considering their investment objectives. Different mutual funds may also be subject to different risks, volatility, and fees and expenses.

Vendors

Generally, 403(b) participants can only contribute to the vendors offered or sponsored by their employers. Financial planners are nearly unanimous in their aversion to 403(b) limited choices. If you are already contributing to, or plan to setup 403(b) account, always seek objective information about 403(b) vendors and products they offer. Vendors are offering, and can recommend only products of companies they represent. Ask yourself the following questions:

Am I speaking with a good salesperson or a good financial planner?

Is this product in alignment with my investment objectives, risk tolerance, my age and time horizon?

How this investment will be integrated in my overall financial picture?

Please feel free to contact me if you or somebody you know needs a free evaluation of 403(b) allocations and/or 403(b) options.

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* Investors should discuss any potential tax benefits with their tax advisor. If an investor invests in a variable annuity through a tax-advantaged retirement plan, the investor will realize no additional tax advantage from the variable annuity. Investors should carefully consider the financial strength of the insurance company that sponsors the variable annuity. This can affect the insurance company’s ability to pay claims beyond the value of your account in the investment options, such as a death benefit. Investors should note that variable annuities are suitable for long-term investors only. Variable annuities are not suitable for short-term investment goals as substantial taxes and insurance company charges may apply if you withdraw your money early from the variable annuity. Variable annuities involve investment risk and will fluctuate in value.