403b variable annuity question

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403b variable annuity question

Postby genjix » Thu Mar 17, 2011 8:53 pm

Hello,

My company (non profit) has a 403b plan which is a variable annuity plan. But researching this i found
No further tax benefit is achieved by investing 403(b) and 457(b) money in an annuity.

I'm not exactly sure what this means. From what I understand, in order to participate in my company 403b I only have the variable annuity as a choice.
Also, i called mass mutual to confirm if i were to leave the employer, that I can roll it over to a traditional IRA and thats really why i wanted to participate in this plan.
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Postby Default User BR » Thu Mar 17, 2011 11:58 pm

Basically it's an extra layer of fees in your case.



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Postby Optimistic » Thu Mar 17, 2011 11:59 pm

Hi genjix,

One of the advantages of a variable annuity is they are tax-deferred. However, a 403b plan is already tax-deferred (as is a 401k and an IRA and a 457b etc...). So, the tax-deferral benefit of the variable annuity offers no advantage in a 403b.

Although some variable annuities are okay, most are very costly. Most have very high operating expenses. And, if you wanted to later transfer the funds from your 403b variable annuity to an IRA, you will almost definitely be charged a surrender fee of somewhere around 5%. If the idea is to just fund an IRA anyway, why not just open up an IRA with Vanguard or Fidelity or Schwab or T. Rowe Price or whoever instead of messing with the variable annuity in your 403b?

Respectfully,
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Postby retiredjg » Fri Mar 18, 2011 12:11 am

genjix, the way I understand it, all 403 accounts are variable annuities or at least that word "annuity" is used. It was set up that way by law. I don't have all the facts straight on this - just remember something from awhile back. I don't believe this is something you need to be concerned about.

Check out this website called 403bwise.com.
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Postby genjix » Fri Mar 18, 2011 12:17 am

Optimistic wrote:Hi genjix,

One of the advantages of a variable annuity is they are tax-deferred. However, a 403b plan is already tax-deferred (as is a 401k and an IRA and a 457b etc...). So, the tax-deferral benefit of the variable annuity offers no advantage in a 403b.

Although some variable annuities are okay, most are very costly. Most have very high operating expenses. And, if you wanted to later transfer the funds from your 403b variable annuity to an IRA, you will almost definitely be charged a surrender fee of somewhere around 5%. If the idea is to just fund an IRA anyway, why not just open up an IRA with Vanguard or Fidelity or Schwab or T. Rowe Price or whoever instead of messing with the variable annuity in your 403b?

Respectfully,
Optimistic


The person at mass mutual told me that in 2006, laws have changed where you can move around tax deferred retirement accounts into other types of tax deffered retirement accounts fairly easily and without fees (and i hope it is true, i will dig some more to verify).
The reason why I wanted participate into the 403b is if I contribute 10k into the 403b then I will actually go into the 15% tax bracket. Also I wanted to max it out at $16,500 this year and traditional IRA on my own would only allow me to contribute 5k max.
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Postby genjix » Fri Mar 18, 2011 12:21 am

retiredjg wrote:genjix, the way I understand it, all 403 accounts are variable annuities or at least that word "annuity" is used. It was set up that way by law. I don't have all the facts straight on this - just remember something from awhile back. I don't believe this is something you need to be concerned about.

Check out this website called 403bwise.com.


thanks for the link, will look into it, I only got concerned about this because I got the book "bogleheads guide to investing" today and I'm half way through it, one chapter covers different types of tax deferred plan and kind of frowned uponed variable and fixed annuities which then raised my antennas
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Postby sscritic » Fri Mar 18, 2011 12:46 am

There is a difference between saying not to buy a variable annuity inside a tax deferred vehicle and saying a tax deferred vehicle is a variable annuity.

The original 403(b) had to be issued as an annuity by an insurance company. You couldn't have a 403(b) and not have an annuity. TIAA-CREF has been serving employees of educational institutions and non-profits for many year. Yes, it is an insurance company. Yes, it offers 403(b)s. Those 403(b)s are annuities. They are not evil. The IRS calls 403(b)s annuities.
IRC 403(b) Tax-Sheltered Annuity Plans

A 403(b) tax-sheltered annuity (TSA) plan is a retirement plan, similar to a 401(k) plan, offered by public schools and certain 501(c)(3) tax-exempt organizations. An individual may only obtain a 403(b) annuity under an employer’s TSA plan.
http://www.irs.gov/retirement/article/0 ... 30,00.html

Mutual fund companies can now be involved in 403(b)(7)s, where a custodian invests in mutual funds for you. However, it is still called a Tax Sheltered Annuity.
What is a 403(b) Plan?

A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers.

Individual accounts in a 403(b) plan can be any of the following types.
    * An annuity contract, which is a contract provided through an insurance company,
    * A custodial account, which is an account invested in mutual funds, or
    * A retirement income account set up for church employees. Generally, retirement income accounts can invest in either annuities or mutual funds.
http://www.irs.gov/publications/p571/ch01.html
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Postby Sekar » Fri Mar 18, 2011 1:50 am

sscritic,
Are the expenses in these tax deferred annuity plans higher than pure mutual fund investments. Are these annuities like the ones that insurance people sell where you put in 10k or more and the money grows tax fee and has a death benefit. I am just now studying up on these products.
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Postby Optimistic » Fri Mar 18, 2011 9:00 am

genjix wrote:
Optimistic wrote:Hi genjix,

One of the advantages of a variable annuity is they are tax-deferred. However, a 403b plan is already tax-deferred (as is a 401k and an IRA and a 457b etc...). So, the tax-deferral benefit of the variable annuity offers no advantage in a 403b.

Although some variable annuities are okay, most are very costly. Most have very high operating expenses. And, if you wanted to later transfer the funds from your 403b variable annuity to an IRA, you will almost definitely be charged a surrender fee of somewhere around 5%. If the idea is to just fund an IRA anyway, why not just open up an IRA with Vanguard or Fidelity or Schwab or T. Rowe Price or whoever instead of messing with the variable annuity in your 403b?

Respectfully,
Optimistic


The person at mass mutual told me that in 2006, laws have changed where you can move around tax deferred retirement accounts into other types of tax deffered retirement accounts fairly easily and without fees (and i hope it is true, i will dig some more to verify).
The reason why I wanted participate into the 403b is if I contribute 10k into the 403b then I will actually go into the 15% tax bracket. Also I wanted to max it out at $16,500 this year and traditional IRA on my own would only allow me to contribute 5k max.


Hi genjix,

You ARE able to move from the 403b to an IRA without any fees paid to the IRS. This is what the Mass Mutual person is most likely referencing. However, it is very likely you ARE NOT able to move money from the 403b to an IRA without paying fees to Mass Mutual. This is known as a surrender charge. Again, it has nothing to do with any law. It has to do with the (probably complex) contract of the variable annuity. If you really want to consider the variable annuity (and with $16,500 to invest this year it is worth considering) you need to examine the contract. Be forewarned, they are many times 100+ pages long. It probably won't be worth it to use the 403b if you're going to have to pay 3% for the variable annuity for a year or two while you use it and then another 5% on top of that when you roll it over. You'll need to compare the expected return and tax consequences from the 403b to a taxable account with expenses of around 0.2%

Respectfully,
Optimistic
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I have had a Fido 403B for 15 years

Postby Marmot » Fri Mar 18, 2011 9:54 am

My costs are $25 a year to Fido outside fund costs. I have about 200 funds I can invest in. Very pleased. The company moved to a 401K about 7 years ago, it looks and acts just like my 403B.


Are the expenses in these tax deferred annuity plans higher than pure mutual fund investments. Are these annuities like the ones that insurance people sell where you put in 10k or more and the money grows tax fee and has a death benefit. I am just now studying up on these products.[/quote]
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Postby genjix » Fri Mar 18, 2011 12:03 pm

sscritic wrote:There is a difference between saying not to buy a variable annuity inside a tax deferred vehicle and saying a tax deferred vehicle is a variable annuity.

The original 403(b) had to be issued as an annuity by an insurance company. You couldn't have a 403(b) and not have an annuity. TIAA-CREF has been serving employees of educational institutions and non-profits for many year. Yes, it is an insurance company. Yes, it offers 403(b)s. Those 403(b)s are annuities. They are not evil. The IRS calls 403(b)s annuities.
IRC 403(b) Tax-Sheltered Annuity Plans

A 403(b) tax-sheltered annuity (TSA) plan is a retirement plan, similar to a 401(k) plan, offered by public schools and certain 501(c)(3) tax-exempt organizations. An individual may only obtain a 403(b) annuity under an employer’s TSA plan.
http://www.irs.gov/retirement/article/0 ... 30,00.html

Mutual fund companies can now be involved in 403(b)(7)s, where a custodian invests in mutual funds for you. However, it is still called a Tax Sheltered Annuity.
What is a 403(b) Plan?

A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers.

Individual accounts in a 403(b) plan can be any of the following types.
    * An annuity contract, which is a contract provided through an insurance company,
    * A custodial account, which is an account invested in mutual funds, or
    * A retirement income account set up for church employees. Generally, retirement income accounts can invest in either annuities or mutual funds.
http://www.irs.gov/publications/p571/ch01.html


thanks for those references, they cleared up a lot for me.
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Postby genjix » Fri Mar 18, 2011 12:05 pm

Optimistic wrote:
genjix wrote:
Optimistic wrote:Hi genjix,

One of the advantages of a variable annuity is they are tax-deferred. However, a 403b plan is already tax-deferred (as is a 401k and an IRA and a 457b etc...). So, the tax-deferral benefit of the variable annuity offers no advantage in a 403b.

Although some variable annuities are okay, most are very costly. Most have very high operating expenses. And, if you wanted to later transfer the funds from your 403b variable annuity to an IRA, you will almost definitely be charged a surrender fee of somewhere around 5%. If the idea is to just fund an IRA anyway, why not just open up an IRA with Vanguard or Fidelity or Schwab or T. Rowe Price or whoever instead of messing with the variable annuity in your 403b?

Respectfully,
Optimistic


The person at mass mutual told me that in 2006, laws have changed where you can move around tax deferred retirement accounts into other types of tax deffered retirement accounts fairly easily and without fees (and i hope it is true, i will dig some more to verify).
The reason why I wanted participate into the 403b is if I contribute 10k into the 403b then I will actually go into the 15% tax bracket. Also I wanted to max it out at $16,500 this year and traditional IRA on my own would only allow me to contribute 5k max.


Hi genjix,

You ARE able to move from the 403b to an IRA without any fees paid to the IRS. This is what the Mass Mutual person is most likely referencing. However, it is very likely you ARE NOT able to move money from the 403b to an IRA without paying fees to Mass Mutual. This is known as a surrender charge. Again, it has nothing to do with any law. It has to do with the (probably complex) contract of the variable annuity. If you really want to consider the variable annuity (and with $16,500 to invest this year it is worth considering) you need to examine the contract. Be forewarned, they are many times 100+ pages long. It probably won't be worth it to use the 403b if you're going to have to pay 3% for the variable annuity for a year or two while you use it and then another 5% on top of that when you roll it over. You'll need to compare the expected return and tax consequences from the 403b to a taxable account with expenses of around 0.2%

Respectfully,
Optimistic


HI, thanks for the additional information. I called mass mutual again just to verify, and there would be no surrender charges if i were no longer employed by my currrent employer. I'm not sure about the other charges, but I'll see i'll ask for a copy of the contract.
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NFP 403(b)

Postby crefwatch » Fri Mar 18, 2011 12:40 pm

The most important thing is for you to start saving for retirement.

Most charities only offer a 403(b) for that, and only wealthy charities (like universities or research labs) offer partial matching (i.e. free money) of your own contributions. Does your employer match?

We don't get to choose our provider, the charity chooses one. It's peculiar that they often select more expensive companies, because there is typically no expense to the employer to set up and run the plan.

Since I used to have a Mass Mutual retirement plan (from a union), I can tell you that they typically use some of their own investment products, plus some popular mutual funds, which they bundle into a Separate Account of Mass Mutual's insurance business. This has the bad effect of giving them a different unit value from what you read in the newspaper or on the internet. But it's the same investment.

You should check exactly what the real expense ratios charged by Mass Mutual are-they may not be the same as the underlying mutual fund. Luckily, these days, competition often forces them to offer an Equity Index product with a very low expense ratio. The other options may be more expense.

It's not fair to judge you "through the internet". But unless you had an IRA or Roth IRA, and contributed the maximum possible to it last year, stop looking for reasons not to sign up for this plan. :-) You need to start saving for your retirement now. You've answered the most important questions, about surrender charges. You're not likely to be at the same employer ten years from now, and you can roll over the 403(b) to an IRA, or possibly into a better plan at your next employer.
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