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Subject:  Re: 403B Fees Date:  12/9/1998  2:27 PM
Author:  TMFPixy Number:  7134 of 88544

Greetings, Cody, and welcome. You wrote:

<<Several years ago I set up a 403b TSA annuity account through an insurance company. From what I have been reading lately on this board is that TSA accounts are a horrible investment and it would be worth it to pay the 5% penalty to cancel the contract with the insurance company. If I do this, will I have to pay any taxes or can I roll it over into a new 403b plan? Can I now go directly to a Mutual Fund company and set up a 403b account? If so, which Mutual Fund companies offer 403b accounts? I am not sure I asked the right questions, but I guess I want to know my options after I cancel the contract.>>

Maybe it may be more productive to cancel your annuity and move to something like an index fund, and maybe not. You have to run some numbers to be sure. You can switch if you wish. On surrender of the annuity, you can be cashed out and you'll have to pay the surrender fee. Remaining cash may then be transferred to a 403b(7) account to be invested in mutual funds with a fund family that accepts such accounts. Vanguard does, and will help you through that process if you ask. There will be no taxes or penalty to be paid if you arrange for a transfer of the net proceeds from the annuity to the fund.

As to whether you should do that, though, you must do an analysis. Look at what your annuity returns now. Compare that to what you could get on the net proceeds elsewhere. Ask yourself what each would be worth at retirement. The one that's bigger when you need the money should get your nod. Let's look at an example. Say you have $15K in the annuity, and it earns 9% per year. You want to move it to an index fund where it will get 10.5% per year. To do so, on surrender you must pay a 5% penalty, leaving only $14.25K to invest. Which will be bigger in 20 years? 3 years?

Left in the annuity, the $15k growing at 9% would be worth $84,066 in 20 years. The $14.25K invested at 10.5% would be $104,969. In that case, the switch is better. Now say you need the money in 3 years. At that point in time the annuity would be worth $19,425, but the $14.25K would only grow to $19,227. Staying put is better in that instance.

Do that kind of analysis and the choice should be clear to you.


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