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|Subject: Re: Expensive annuity in 403 (b)||Date: 12/2/1999 3:27 PM|
|Author: TMFPixy||Number: 15846 of 76610|
Greetings, Xnocturnal, and welcome. You wrote:
<<I have been lurking on this boards for couple of months and learning a lot.
At present I am struggling with the following dilemma.
My employer is using variable annuity as an investing vehicle for the 403(b) plan. They (American United Life
Insurance Company) seem to have some decent choices but the EXPENSES ARE HIGH !!!! 1.25% added on top of
the mutual fund-like subaccount expense. So some of the subaccount choices end up costing whopping 2.45% and S@P 500-like subaccount 1.53%. There is also $30 annual fee. How about 8% surrender charge?!!!. Funny that none of the company reps mentions any of that when you sign up for this thing. Another thing, there is no matching from employer.
Considering all of the above, would I be "foolish" to just stick with my Roth IRA - up 38% this year, and taxable account- up 35% this year, and not bother with this annuity thing???? Or should I chip in some small amount in to this expensive tax deferral ??? >>
Your employer makes no contribution to your 403b plan. Therefore, you should be able to go outside your employer's recommended provider and instead make your contributions to a 403b(7) account with a mutual fund that accepts such accounts. Both Vanguard and Fidelity do, and they offer a wide selection of funds that can do better than the annuity choices you now have. That may be a better route for you to take.
<<My next question - since this is "before taxes" annuity will I have to pay tax on the whole thing (contributions and earnings) at retirement. I am 44 years old, 28% tax bracket.>>
Yes, you will pay taxes on all that comes out of the 403b plan when you begin withdrawals in retirement.
In your case use of the 403b plan in the absence of an employer match may not be the best route to go. To see, you must do a tax-equivalent analysis of the plan's investment options versus those you could make in a taxable account and/or a Roth IRA. I suggest one way of doing that in Step 4 of my 13 Steps to Foolish Retirement Planning at http://www.fool.com/Retirement/Retirement.htm. Look that over, see what's involved, and then do a similar number crunching drill for yourself. IMHO the first $2K of your money should go into a Roth IRA to gain the tax-free withdrawals in retirement. After that, look at a taxable account versus the 403b. However, you still have to run some numbers to see what's best for you.
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