I'll be starting a new job in January with a nonprofit that offers employees a "tax-sheltered annuity 403(b)" as the only retirement plan option. I already max out my IRA contributions every year. I have no other retirement vehicles. Should I participate in the 403(b) or pass? How much can I contribute in a given year? I'm 32 years old and not legally married. -- Doug Gary
Ernst & Young's Personal Financial Planning Guide
sums it up best:
If you're eligible to contribute to a 401(k) or 403(b) plan, doing so is a definite "must" because of their distinct tax advantages. The only common disadvantage is that the asset isn't easily available for you to spend until after your retirement. However, this may prove an advantage, since it encourages you to save for retirement. Normally 401(k) and 403(b) plans are considered very good savings options due to their ability to defer taxes on some of your salary and investment income.
A 403(b) plan is a type of retirement plan set up by certain nonprofit organizations, such as hospitals and schools. Like a 401(k), this plan allows employees to invest part of their compensation for their retirement. The contribution limits for 403(b) and 401(k) plans are the same. In 1998, you can contribute up to $10,000 to your employer-sponsored, tax-deferred savings plan. And that doesn't include any matching contributions you might get from your company.
By making pretax contributions to a retirement plan, you have more money working for you at the outset than if the contributions were made after taxes. You also don't have to pay taxes on the earnings each year, which means even more assets for compounding.
Last week, I wrote that some financial advisers warned against using an annuity within a 401(k) plan. That's investing in a tax-deferred vehicle within a tax-deferred vehicle. But that doesn't apply to 403(b) plans, which are a different animal altogether, says Roxanne Fleszar of
Financial Resources Management
in Peabody, Mass.
Once, 403(b) plans could only offer annuities. These retirement plans have been able to offer mutual funds for some time, but you still will see annuity-only plans, in part as a holdover from previous regulations.
The kinds of annuities that you will find in a 403(b) are designed for these plans. "Often they will have institutional pricing and lower fees," says Fleszar.
All that said, make sure you are completely clear on your plan's rules regarding administration, contributions, investments and taxation of benefits.
"Is your organization offering matching?" asks Fleszar. "You would certainly like to get that." You should also carefully examine the providers. Unlike 401(k) plans where all the investments will be directed through one firm, many 403(b) plans will offer multiple providers, says Fleszar. Or your plan may also allow you to find your own investment provider.
Fees are always a big concern, and Fleszar suggests looking at each investment's prospectus to examine each annuity's charges and expenses. (For a breakdown of fees and other charges, read my
Fund Forum from last Thursday and our
Lastly, you always want to inspect the underlying fund investments in each annuity. You should do the same research on the annuity that you would do on a mutual fund. Read
column on choosing funds as a starting point.
One reader wrote to say that my
column on annuities last week did not mention a key benefit: that some states protect assets in annuities from creditors.
My column on Thursday was specifically about using an annuity in a 401(k) plan. And qualified retirement plans, such as 401(k)s, also are protected from creditors.
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