Through my employer I have an annuity. This annuity is called a 403(b)7 plan. I currently contribute 6% per pay period because that is the amount that my employer will match. This is a pretax contribution. I would like to start contributing more than 6% even though my employer will not match my increased efforts, due to gaining an increased tax shelter. My question is this: is there either percentage max limit or maximum contribution limit on these types of arrangements, similar to the $4000 limit on IRA contributions. I can and probably will ask the program administrator, but I would like to know the answer before I talk to him.
Any other information regarding these plans is welcome.

Greetings, JimFish, and welcome.

<<Through my employer I have an annuity. This annuity is called a 403(b)7 plan. I currently contribute 6% per pay period because that is the amount that my employer will match. This is a pretax contribution. I would like to start contributing more than 6% even though my employer will not match my increased efforts, due to gaining an increased tax shelter. My question is this: is there either percentage max limit or maximum contribution limit on these types of arrangements, similar to the $4000 limit on IRA contributions. I can and probably will ask the program administrator, but I would like to know the answer before I talk to him.>>

Basically, it's the same limit as that found in a 401k: The lesser of 25% of your compensation or $10K in 1998.

Unless you have a compelling reason to go beyond the employer match in an annuity, you may want to investigate putting your next $2K in a Roth IRA in an index fund if nothing else. Almost assurredly the index fund will outperform your annuity because they are generally quite lousy investments over the long term. The Roth contribution won't give you an immediate tax deduction, but it grows tax deferred and ultimately all of the proceeds will come to you totally free of tax. It's worth a look in your situation.

Regards....Pixy

<<The Roth contribution won't give you an immediate tax deduction, but it grows tax deferred and ultimately all of the proceeds will come to you totally free of tax.>>

Pixy, isn't it technically correct to say it grows tax free instead of tax deferred. Tax deferred would imply a tax on it at some time in the future. (The government probably called it tax deferred to indicate future plans. I am so cynical.)

I apologize if you think I am picking on you. Bad week at work. You can look and see that you are my favorite Fool.

PSUEngineerfool,

<<Pixy, isn't it technically correct to say it grows tax free instead of tax deferred. Tax deferred would imply a tax on it at some time in the future. (The government probably called it tax deferred to indicate future plans. I am so cynical.)>>

IMHO, no. Potentially the earnings ARE taxable unless on withdrawal they meet the definition of qualified, which means after five years AND:
a. At age 59 1/2 or later.
b. At death.
c. After disability determination.
d. For a first-time home purchase subject to the $10K lifetime limit.

As a quick example, I could withdraw earnings prior to age 59 1/2 for education expenses. I would escape the 10% penalty, but my withdrawal would be taxed. Or I could take earnings just because I felt like it. In that case, they would be taxed and penalized.

Regards....Pixy

Pixy

You are right again. It has been a bad week. I will resign for the weekend and get some rest. I bow to your wisdom. LOL

<Almost assurredly the index fund will outperform your annuity because they are generally quite lousy investments over the long term.>

Pixy,

Do you really think annuities are lousy when compared head to head with a mutual fund within an IRA?

I have a variable annuity through my 403(b) plan which invests in stocks much like a fund. I'd be interested in hearing what you think the disadvantages are compared to a mutual fund in an IRA.

Thanks.
-TinyTone

TinyTone wrote:
<<Do you really think annuities are lousy when compared head to head with a mutual fund within an IRA?

I have a variable annuity through my 403(b) plan which invests in stocks much like a fund. I'd be interested in hearing what you think the disadvantages are compared to a mutual fund in an IRA.>>

There was an interesting article in Monday's Wall Street Journal (their weekly Annuities column) that discussed a Morningstar study comparing returns on variable annuity investments to mutual funds with similar objectives. If I remember correctly, plain old mutual funds came out ahead in something like 6 of 8 categories.

I didn't pay too much attention to the article, but one thing I do remember was a quote from a very Wise person trying to make the case for annuities by saying that, rather than looking at the performance of individual components, one needs to look at the overall performance of portfolios. This is certainly a very Foolish concept, but it seems unlikely that a portfolio of poorly performing investments is likely to magically become a winner.

<Do you really think annuities are lousy when compared head to head with a mutual fund within an IRA?

I have a variable annuity through my 403(b) plan which invests in stocks much like a fund. >

I think that variable annuities are lousy. There is no reason to have one inside an IRA, since that keeps you from using the IRA funds for something more productive, and if you insist on having a variable annuity anyway, you get all the tax advantages (except the initial deductability) by having it outside your IRA.

I had a variable annuity for 20 years or so that I cashed out after running the numbers. I put about $30,000 in and got about $50,000 out. This gives an annualized rate of return of about 2.6%. You can do better with a certificate of deposit. Of course, I got unneeded (I have no dependents) life insurance with it, but if I needed life insurance, I could have obtained term insurance cheaper.

TinyTone,

<<Do you really think annuities are lousy when compared head to head with a mutual fund within an IRA?

I have a variable annuity through my 403(b) plan which invests in stocks much like a fund. I'd be interested in hearing what you think the disadvantages are compared to a mutual fund in an IRA.>>

The annuity adds an extra layer of mortality and administrative expenses. Take the same fund by itself, and all you have to affect the return is the expense incurred by the fund. Put that fund inside an annuity, and now you have the others as well. In direct competition within an IRA, the fund standing alone will beat the fund inside the annuity every time.

Regards….Pixy

TinyTone,

<<Do you really think annuities are lousy when compared head to head with a mutual fund within an
IRA?

I have a variable annuity through my 403(b) plan which invests in stocks much like a fund. I'd be
interested in hearing what you think the disadvantages are compared to a mutual fund in an IRA.>>

< The annuity adds an extra layer of mortality and administrative expenses. Take the same fund by
itself, and all you have to affect the return is the expense incurred by the fund. Put that fund inside an
annuity, and now you have the others as well. In direct competition within an IRA, the fund standing
alone will beat the fund inside the annuity every time.

Regards….Pixy>

I find the discussion about variable annuities in a 403(b) plan to be a little confusing. I'm not certain that the "varible annuity" that an individual can buy through an insurance company is the same as what is offered in at least my 403(b). My company puts our 403(b) in a plan with TIAA-CREF. They define an annuity as: "An annuity is a 'sum of money payable yearly or at other regular intervals.' Annuities are generally used to accumulate funds for retirement or other long-range goals and/or to receive periodic income payments for life or for a set period of time." In this case there is no provision for mortality. They further define Variable Annuity as "An annuity, the value of which fluctuates based on the market performance of an underlying securities portfolio. Unlike Fixed Annuities, there is no guarantee of principal or rate of return."

Again there is no provision for mortality. I also thought I read somewhere that a 403(b) must be invested in a variable annuity, but I don't recall where and am probably wrong.

TIAA-CREF also benchmarks against typical market indexes. I won't claim stellar performance, but they are close to market averages for mutual funds. Year to date for their major fund is 15.6%+ And their administrative expenses seem pretty low about .3 to .4 percent for most funds.

Also, while they are set up to pay out in an annuity stream, I also have the option to roll the entire amount over into an IRA or another 403(b) if I leave the company or when I retire. I'm not convinced that this is as bad a deal as other comments imply. I also don't know if this is typical for a 403(b) plan, although they are one of the largest providers in the country.

And TIAA-CREF confuses it further because they do sell life insurance.

Greetings, CodyZen, and welcome.

<<I find the discussion about variable annuities in a 403(b) plan to be a little confusing. I'm not certain that the "varible annuity" that an individual can buy through an insurance company is the same as what is offered in at least my 403(b). My company puts our 403(b) in a plan with TIAA-CREF. They define an annuity as: "An annuity is a 'sum of money payable yearly or at other regular intervals.' Annuities are generally used to accumulate funds for retirement or other long-range goals and/or to receive periodic income payments for life or for a set period of time." In this case there is no provision for mortality. They further define Variable Annuity as "An annuity, the value of which fluctuates based on the market performance of an underlying securities portfolio. Unlike Fixed Annuities, there is no guarantee of principal or rate of return."

Again there is no provision for mortality. I also thought I read somewhere that a 403(b) must be invested in a variable annuity, but I don't recall where and am probably wrong.

TIAA-CREF also benchmarks against typical market indexes. I won't claim stellar performance, but they are close to market averages for mutual funds. Year to date for their major fund is 15.6%+ And their administrative expenses seem pretty low about .3 to .4 percent for most funds.

Also, while they are set up to pay out in an annuity stream, I also have the option to roll the entire amount over into an IRA or another 403(b) if I leave the company or when I retire. I'm not convinced that this is as bad a deal as other comments imply. I also don't know if this is typical for a 403(b) plan, although they are one of the largest providers in the country. >>

I confess I know little about TIAA-CREF's variable annuities, but I do respect the organization. It is a large 403b provider, but still many 403b plans do not use their offerings. In fact, most of the posts I've seen on 403b annuities in this folder indicate they are insurance company products furnished by other companies. That's the kind of product I was referring to in my previous post. TIAA-CREF's may be different, but as I said I really don't know.

BTW, a 403b may be invested in annuities OR mutual funds. From what I understand about TIAA-CREF's annuity, you cannot get a lump sum at retirement. Instead, I understand that to phase out the annuity at retirement and transfer the money to an IRA you must do so over a ten-year period of time. That's not quite as easy as it would be if the 403b was invested in mutual funds instead.

Regards…..Pixy