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Author: CJSmith241 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76235  
Subject: Tax Sheltered Annuity-Bad idea? Date: 8/5/2006 10:35 PM
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Greetings fellow Fools. I certainly hope someone could help me out here. I am a teacher just about to start my sixth year. During my first year teaching a really nice fellow came into the teacher's lounge, offered sandwiches and asked me if I thought of my retirement. No, I hadn't but about two hours later, he had me signed up for a tax sheltered annuity plan. I didn't know it then but I now know that TSA's are not the best way to go when you are contributing to a 403 retirement plan. However, my financial planner (or whatever you want to call him) did do a good job suggesting mutual funds for this plan. In the past five years, I have made about $1200. The only time I lost anything was in the past few months and that was only $40 or so. I've paid about $150 worth of fees in the past five years and was told that once I have $20,000 in the account, all fees will be waived.

Question is, is this really that bad of a deal? In addition to this, if I have a 403 plan like this, the school district will throw in some kind of match. Not a lot but it's something.

So what should I do here? Should I stay with this TSA? Any help will be greatly appreciated! Thanks!

CJ
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Author: DeltaOne81 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 52946 of 76235
Subject: Re: Tax Sheltered Annuity-Bad idea? Date: 8/5/2006 11:44 PM
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I would question a little how much you know the details.

I wonder how much you have in the account, and if making '$1200' is something to be happy about. Also, if you only lost $40, are you in investments that are too safe and lacking upside?

Finally, you say that all fees are waived. I somehow doubt that. Maybe the surrender fee goes away. Maybe the M&E fee is reduced, or perhaps even eliminated? But the expense ratios, and perhaps loads, that go along with the fund, would almost certainly not be eliminated.

I suggest you consider learning more about all the fees you're paying. Maybe start by getting a copy of whatever you've signed with them.

Feel free to share any details with us. You may only have paid $150 in some kind of fee, but there are several other kinds you may not even realize, that arent itemized and listed on your statement for you, but merely lower your returns.

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Author: OldOne Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 52948 of 76235
Subject: Re: Tax Sheltered Annuity-Bad idea? Date: 8/6/2006 1:51 AM
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Not only do I agree with DeltaOne81, but I would even more strongly advise you to look into the investment choices you have and try to select the lowest-cost place to put your money into index funds.

The bottom line on this is that any investment which is sold by what amounts to a traveling salesman is liable to be a poor choice. If it was a good choice it wouldn't need a traveling salesman. Remember, that "really nice fellow" earns a salary, or a commission, or both, and his pay comes out of the money you invest. And, is he really that nice, since he seems to have steered you into an investment class you now know is not realy what you should have?

A total stock market index (conservative) or a Russell 2000 (more agressive) index fund would be a great choice.

You are young enough that I would not worry about fixed income assets in retirement funds. You have a lot of years for the ups and downs of the market to even out.

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Author: buzman Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 52949 of 76235
Subject: Re: Tax Sheltered Annuity-Bad idea? Date: 8/6/2006 10:20 AM
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First let's straigten a couple of things out.

The "mutual funds" the nice man selected are actually sub-accounts of the variable annuity. They have signifigantly higher internal fees that you never see; it just comes from your return. Plus you have horrific surrender charges.

The industry uses tax shelered annuity has the hook. The tax shelter is the 403b plan while the annuity is the vehicle inside the plan. What you doing is akin to taking a shower while wearing a raincoat. You are paying extra for the TSA and getting no extra benefit. Plus the marketing gimmick -tax shelered annuities- is very misleading, you actually have a tax deferral. Calling it a shelter makes it more palatable.

Most teachers are in the lower tax brackets so there is little benefit from salary deferral. So fully fund a Roth.

Then look at saving in a taxable account. Currently capital gains are more favorable than ordinary income.

Lobby your HR and administration. You can have mutual funds instead of annuities, the salespeople don't want to do that because the commissions are less.

Finally, bookmark www.403bwise.com It is an essential website for teachers.

Most school systems kick in extra money in a pension plan not 403b plans because there is no incentive for them to do that. Make sure that you are actually getting a match to your contribution.

Finally, annuity salesmen are sleazebags. Don't mean to sugarcoat it.

buzman

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Author: CJSmith241 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 52955 of 76235
Subject: Re: Tax Sheltered Annuity-Bad idea? Date: 8/6/2006 2:45 PM
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I have about $8,200 in the account right now. I have about $900 in the "matched" account. Our district basically opened up a Terrps account and deposits about $200 or so each year but only if we contribute to a 403b tax sheltered annuity. Also, the district pays us not on how much we contribute but how well our schools perform. Oh, yeah and I also have a mandatory Teacher Retirement Plan that I contribute to.

I know I will have to pay fees on my TSA but I wonder if the Terrps account would balance that out. A TSA is the ONLY option i have through my school district if I want the district to make a contribution into my Terrps retirement account.

By the way, it's the surrender fees that will be waved.

CJ

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Author: DeltaOne81 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 52956 of 76235
Subject: Re: Tax Sheltered Annuity-Bad idea? Date: 8/6/2006 3:12 PM
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Great, another district that's incentivizing you to invest in something that they almost certainly get a 'kick back' from. Although the nice term for that would probably be discount.

The question is, is the tax sheltered annuity costing you more or less than $200/year.


You need to watch the returns of your investment and compare it to appropriate indexes. I'm going to make some quick assumptions which you should not take to be absolute, but you should figure out for your own situation.

I'm going to assume a 1-1.5% M&E fee, a 1.5% expense ratio, and a 5% load on $1500 of contributions per year.

With $8200 in the account, this would cost you $80-$120 per year in M&E fees. Lets say that expense ratio is 1% higher than you could get elsewhere, so that's another $80 or so. And youre paying a 5% load on $1500 contributions, or $75.

So that would be a total of approximately $235 to $275 per year in fees that's taken out of your retire. And we haven't even begun to consider surrender fees.



And as the account grows, these numbers will only grow proportionately. Does this apply exactly to you? I can't say, but you can certainly begin to figure out. In that case, the 'match' is certainly not worth what the TSA is taking from you.



There's *also* the question of what you're invested in. If recently your account only declined $40, you're probably in something far too safe that will never produce much growth for you. Find out what funds you're in, pronto.



Oh a side note, $8200 in 5 years is just not good enough, man. You will never provide yourself any significant retirement security at this rate. I know you're just starting out, and I know teacher's salaries are not the greatest, but you need to determine a plan to begin raising it. If you get a 3 or 4% raise, increase your retirement account contributions 2-3%. You will never miss the money and it will go a long way towards securing your future. You may alternately decide to open a Roth IRA with your raise.

If you do nothing else with this thread, figure out how to get serious about retirement savings. I understand you have a pension as well, so you may not need to save at the rate of others, but you should do the best you can. Saving in high cost investments is still better than not saving enough.

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Author: CJSmith241 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 52970 of 76235
Subject: Re: Tax Sheltered Annuity-Bad idea? Date: 8/6/2006 9:31 PM
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I just did the math and you are absolutely correct! Right now the fees balance out with what the district puts in but like you said, it will increase proportionately. I dug around on the website for my TSA, (Annuity Investors) and discovered that the M&E risk charge is 1.25%. There's an annual administrative charge of .15% and a maintenance fee of $30.00 until the account reaches $40,000 (I was wrong before.) That's quite a bit that I'm paying out just so someone can manage my account. Now I don't know what to do. Remember, our school district has a list of approved companies and they are all TSAs. Can I have a roth if my contributions aren't deducted from my paycheck? Sorry if I sound really clueless here. I pretty much have all my finances in check except for this whole 403b retirement TSA thing.

Oh yeah, by the way, the texas teacher retirement system is my main retirement fund. I have about 12,000 in there and whenever I get a raise, the amount contributed automatically increases. The only problem is that it doesn't grow. It just sits there and does nothing. This TSA is supplemental.

CJ

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Author: SirTas Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 52972 of 76235
Subject: Re: Tax Sheltered Annuity-Bad idea? Date: 8/6/2006 9:43 PM
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I'll answer the Roth question (since that's pretty easy!).

The normal way (and, as far as I know, the only legal way) for contributions to get into a Roth account is "after tax." So, they don't get deducted from your paycheck. You just receive your paycheck as usual (and tax will apply to all this income), and then you can turn around and use some of your net pay in order to open and fund a Roth account. I myself have two Roth accounts, one at Scottrade (where I buy stocks), and one at Vanguard (where I buy funds). If you go to any website (e.g., Vanguard's), they'll have the forms online that you need to open the Roth account. You put after tax money into it, and then you are able to take "qualified distributions" at age 59.5). The money will have grown, but (at least the way tax laws are set up right now), you'll be able to receive those funds tax-free.

--SirTas

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Author: CJSmith241 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 52974 of 76235
Subject: Re: Tax Sheltered Annuity-Bad idea? Date: 8/6/2006 9:55 PM
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Thanks so much! I'll look into that.

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Author: DeltaOne81 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 52978 of 76235
Subject: Re: Tax Sheltered Annuity-Bad idea? Date: 8/6/2006 11:16 PM
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I just did the math and you are absolutely correct! Right now the fees balance out with what the district puts in but like you said, it will increase proportionately.

Glad you've dug into this and figured it out. You're empowering yourself at each step. You may want to share this information with some of your fellow teachers too... and bitch to your union.


Now I don't know what to do. Remember, our school district has a list of approved companies and they are all TSAs.

I'm not familar with 403(b)s, but its my general understanding that you can do whatever you like, not just the 'approved' ones, but this is supposed to be a good site to learn more:

http://403bwise.com/



Can I have a roth if my contributions aren't deducted from my paycheck? Sorry if I sound really clueless here. I pretty much have all my finances in check except for this whole 403b retirement TSA thing.

No problem. We all start somewhere :). Sure, Roth's are rarely deducted from paychecks. You may want to look into opening one up at low cost companies like Fidelity, Vanguard, or T Rowe Price. You may also want to consider their 'Target Retirement' funds (Fidelity calls them 'Freedom'), if you're not too big into making your own investment choices.



Congratulations to slowly entering the world of people *not* being ripped off in their retirement accounts :)

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Author: CJSmith241 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 52990 of 76235
Subject: Re: Tax Sheltered Annuity-Bad idea? Date: 8/7/2006 6:59 PM
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Thanks again for all your help. I checked out Fidelity even before reading the final post and saw the Freedom Funds. I think I might do some more research on other mutual funds. I'd like to be a little more agressive in my investments but not too agressive.

BTW, I already mentioned to a teacher in my school who was considering a 403B through our district NOT TO DO IT!! Now she wants me to come with her to talk to her financial advisor because apparently, I know what questions to ask and understand this more than she does. Just to think, yesterday I was pretty much clueless! Thanks again for all your help.

CJ

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 52991 of 76235
Subject: Re: Tax Sheltered Annuity-Bad idea? Date: 8/7/2006 7:32 PM
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I checked out Fidelity even before reading the final post and saw the Freedom Funds. I think I might do some more research on other mutual funds. I'd like to be a little more agressive in my investments but not too agressive.

One tip for things like the Freedom funds is you can tweak the risk you are taking by picking a fund that isn't quite your actual retirement date.

For example, if you plan on retiring in 2025, you can take on a bit more risk by picking the 2030 fund instead. And even more risk by picking the 2035 fund. Or you can take a little less risk by picking an earlier fund, say 2020.

--Peter

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Author: clifp Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 53000 of 76235
Subject: Re: Tax Sheltered Annuity-Bad idea? Date: 8/8/2006 12:16 AM
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I just did the math and you are absolutely correct! Right now the fees balance out with what the district puts in but like you said, it will increase proportionately.

Glad you've dug into this and figured it out. You're empowering yourself at each step. You may want to share this information with some of your fellow teachers too... and bitch to your union.



I haven't been reading this board that long (but have read other investment/retirement board for a long time.) but I have been amazed at the number of teachers who have been victims of shark attacks (i.e. annuity salesman).

After reading the excellent website www.403bwise.com I realize that CJSmith story is actually a common one.

"All told, 6.8 million educators and other nonprofit employees have almost $580 billion in assets in 403(b) plans. Some 80% of this is in fixed and variable annuities, and the business is growing 9% a year, says Spectrem Group, which consults to insurers. " from a recent Forbes article.

This is outrageous and it appears that both the teacher's union and the school districts are complicit in allowing this to happen. As tax payers we are on the hook for teachers expensive traditional pensions, one easy way to give teachers a raise and gradually wean them off the underfunded public employee pension funds is to advocate that there 403B plans have better choices.

I am going to do a bit of investigating and see what choice's Hawaii teacher have, and I am going to make sure every teacher I know learns about 403bwise.com.



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Author: TMFDataGeek One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 53027 of 76235
Subject: Re: Tax Sheltered Annuity-Bad idea? Date: 8/9/2006 12:42 AM
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The problem with where you're allowed to invest is that TSA contributions MUST BE PAYROLL DEDUCTION BY LAW. You can't pick where you send the money unless payroll agrees to send it there. Most districts limit the number of vendors cause they refuse to send money to 50 places every payroll. Can you blame 'em? Most of the TSA vendors work their buns off setting up ACH (electronic deposit) arrangements with payroll, and that gives them a lock on one of maybe 10 or 15 slots a school will tolerate.

BUT THERE'S GOOD NEWS! A new 403(b) regulation takes effect next year, I believe. Dan Otter, who runs 403(b)wise, wrote it up for Fools over a year ago at http://www.fool.com/news/commentary/2005/commentary05033104.htm

Sponsoring employers have been able to wash their hands of these plans - they took no responsibility for anything but the payroll piece. Soon they will become plan fiduciaries, responsible for the operation of the plan and the quality of investments offered. Things will get better, but it will take awhile.

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