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Greetings, Crowinghen, and welcome. You asked:

<<My husband's work has a 403b plan. I'm investigating the investment options that are available ... but it looks to me that tax-sheltered annuities are the only option...what exactly are they? Can anyone give me some basics about them?>>

An annuity is an investment which will pay a stream of income for a fixed period of time or for life. In a 403b plan, the annuity begins at retirement and the payment is contingent on how much was invested during a person's working career. Annuities may be fixed or variable investments. A fixed annuity provides a fixed rate of return on the amount invested, and thus provides a stable, fixed income during its life. A variable annuity provides a rate of return based on the performance of the underlying investments selected by the purchaser when the product was bought, and thus will vary from year to year. While the fixed annuity is more stable, its income will erode each year because of inflation. The variable annuity will have less predictable income (higher one year, lower the next), but provides greater inflation protection because of its flexibility in investment choices.

Basically, there are two parts to 403b plan annuities. The first part is the accumulation
phase where deposits grow on a tax deferred basis and any withdrawals are subject to early withdrawal penalties just as an IRA would be. The main idea behind an annuity is
receiving a flow of cash from it over a specified period of time (5yrs, 10yrs, 20 yrs, a lifetime, etc.) Most annuities are purchased through insurance companies as there is an element of insurance involved with guaranteeing payments over any period of time.

IMHO, the cons to an annuity are that they have insurance expenses not involved with an ordinary investment. These fees on top of potential loads and transaction fees eat into possible returns. If you want out early or before age 59 1/2, either the product or the tax man or both may impose some fairly steep penalties for that early withdrawal. To truly make them worthwhile, one has to hold them at least ten years, but probably closer to twenty, before they would normally beat a comparable taxable investment in a stock mutual fund, and then only if it's a variable annuity. Fixed annuities are easy to beat if the same funds are invested on a tax-deferred basis in an S&P 500 index fund.


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