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Author: DW525 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76392  
Subject: Variable Annuities and 403(b)'s Date: 4/10/1999 11:28 PM
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I have went back and read other posts on this subject but am still confused. Is there any difference between a 403(b) and a variable annuity? I currently am involved in a 403(b) which I have invested in a stock index fund. After all, my 403(b) is also called a "tax-sheltered annuity." Please help. I read the "Smart Money" link on variable annuities and am still confused.

Thanks,
Dave
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Author: zgriner Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9850 of 76392
Subject: Re: Variable Annuities and 403(b)'s Date: 4/11/1999 12:17 AM
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TMFPixy will give you a better answer, I am sure, but here goes.

Your 403b is similar to a 401k, in that funds saved are tax-deferred. That means you only pay tax on withdrawn funds. An annuity works the same way. However, I believe you can cash out your 403b money and roll it into a self-directed IRA, if you leave your job or retire. You can't do that with an ordinary annuity, since it is not a retirement plan, merely a "tax-advantaged life insurance vehicle" (I read that somewhere). You can purchase an annuity within your 403b, which will let you cash out and roll that money into an IRA if you wish.

Zev

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Author: dharmadollars Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9851 of 76392
Subject: Re: Variable Annuities and 403(b)'s Date: 4/11/1999 1:39 AM
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A 403(b) refers to the section of the IRC that creates this particular form of retirement savings vehicle. As I believe Zev pointed out, contributions are made with pre-tax dollars. There are annual funding limits, and under some circumstances there are "catch-up" provisions which allow you to contribute more.

A variable annuity is an investment vehicle available through life insurance companies. I believe that they are the only financial entity that , by statute, can offer this vehicle. It is not, however, a life insurance product, though variable annuities do have a life insurance component, to wit, if you die before annuitizing (beginning to take scheduled periodic distributions) your estate or beneficiary will receive an amount at least equal to your contributions, less any withdrawals you have taken.

A variable annuity is an investment vehicle, not a retirement plan. When a variable annuity is used as the investment vehicle in a retirement plan such as a 403(b) it is classified as a "qualified annuity" which simply means that contributions are made with pre-tax dollars, and that all money paid out is taxable income. Thus the term tax sheltered annuity; not only is the growth sheltered until distribution; the initial principal is also sheltered.

When money is invested in an annuity which is not in a retirement plan it is referred to as a non-qualified annuity. That simply means that the funding is with after-tax dollars, and that rules governing qualified retirement plans using VAs as funding vehicles do not apply.

Zev is correct in noting that monies housed in a VA inside a qualified retierment plan can br rolled into an IRA when you leave an employer. The IRC permits this. But in rolling this money over you may incur a surrender charge if you surrender the annuity contract. This charge will be articulated in the annuity contract, and is not a function of the IRC; it is strictly a function of the contract.

You can, however, reclassify the annuity contract from a 403(b) to an IRA, while maintaining the contract. This will not result in a surrender charge. Then, when the surrender period disappears you can reposition the money into alternative investment vehicles if you choose without incurring a surrender charge.

In short, a 403(b) and a 401(k) are qualified retiement plans. Both can use variable annuities a funding vehicles, which is what VAs are.

Hope this helps. If not, ask some more questions.

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9856 of 76392
Subject: Re: Variable Annuities and 403(b)'s Date: 4/11/1999 11:04 AM
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Dharmadollars,

That was one great reply highlighting the difference between TSAs and VAs.

Thanks for the addition.

Regards..Pixy

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Author: DW525 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9859 of 76392
Subject: Re: Variable Annuities and 403(b)'s Date: 4/11/1999 12:05 PM
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"A variable annuity is an investment vehicle, not a retirement plan. When a variable annuity is used as an investment vehicle such as a 403(b) it is classified as a "qualified annuity" which simply means that contributions are made with pre-tax dollars, and that all money paid is taxable income".

Thanks for the response dharma dollars. I'm still confused though. I have chosen an index fund to contribute to my 403(b). I am assuming that this means that I am not investing in a variable annuity. However, the terms of my plan sound like it is indeed a variable annuity ( I am funding the 403(b) with pre-tax dollars). Does this seem practical for a 29 year old with 30 years to go before retirement? I'm starting to think that a 403(b) may not be a good option.

Dave

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Author: dharmadollars Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9861 of 76392
Subject: Re: Variable Annuities and 403(b)'s Date: 4/11/1999 1:31 PM
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No, the index fund could be one of the investment options housed within the VA. The VA as such is simply a tax wrapper. It houses the individual investment options. There is no contradiction here. The funding vehicle in your 403(b) appears to be a VA. Nothing strange about that. The 403(b) designation allows you to invest on a pre-tax basis. The tax deferral on your investments is a great plus for this portion of your asset accumulation plans. Don't make some kind of mystery of this that doesn't exist. There could be less here than meets the eye.

On the other hand, if you still have questions, keep on posting them. Ignorance is a voluntary misfortune.

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Author: DW525 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9864 of 76392
Subject: Re: Variable Annuities and 403(b)'s Date: 4/11/1999 6:21 PM
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All right, I'll keep posting more questions. Sure, the ability to invest on a pre-tax basis is certainly appealing, but since I will most likely be in a higher income tax bracket once I retire, it seems that a Roth IRA would be a better option. It also appears that investing in a no-load mutual fund on my own outside of the 403(b) would possibly be a better alternative as well, if you take into account all the hidden fees attached to the annuity. Am I on the right track or am I still missing something?

Dave

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Author: dharmadollars Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9865 of 76392
Subject: Re: Variable Annuities and 403(b)'s Date: 4/11/1999 7:29 PM
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It's not that you're missing something. It's that the lenses through which you are viewing things are distorting what you see. Or something. Your inquiry started out being about understanding the difference between a 403b and a variable annuity. Now it seems to have shifted. That's fine. As long as we acknowledge that the nature and scope of the inquiry have changed.

If you're pursuing a strategy that involves both maximum accumulation of and judicious expenditure of assets over a long time horizon you might do one something like the following. When you reach the ripe old age of 59 or so, and you're living in a substantial, comfortable home which you don't wish to leave, you may decide to refinance that home and cash out about $100,000 in equity. You would invest that sum in some configuration whereby you would be earning, say, 9.5%, with 25% of that amount being in the form of taxable gains or distributions. You would have also picked up a substantial mortgage payment, mostly interest. You would take withdrawals from your 403b in amounts equal to the interest on the mortgage. Your taxable distribution would be washed by your interest deduction. In the mean time your $100,000 is smoking along and building additional assets for your later use. My point: there will be later uses for those accumulated pre-tax investments.

The argument is often made that "I will most likely be in a higher income tax bracket once I retire". Make an assumption about how much higher. Build your spreadsheet and calculate the value of your account at some point in time when you will retire with that higher tax bracket. Remember, your spreadsheet will need to account for monthly additions. Next compute the growth of the same amount of additions, reduced by your current combined state and federal tax liabilities on that money. Factor in a column to compute the asset shrinkage imputed for capital gains and/or distributions annually. Now, here'e the tricky part. You must apply assumed rates of return on your two investment strategies. You can pound your chest and make the rate for your non-qualified portfolio high enough, and the other investment low enough, to render the comparison meaningless. Be a little honest here. Finally, "withdraw" the money from both investments systematically, say over 20 years, in your spreadsheet. Apply the appropriate tax rates to each distribution. See how it comes out. My observation over the years is that there will be uses for a little of that tax sheltereed, fully taxable, money over time.

Your question regarding the preferential aspect of a Roth is valid, but only $2,000 worth a year. Is that all you are contributing to the 403b? If not, then your decision about investing through the 403b is still open, after the first $2,000.

The no load issue is an important one. But the impact of the load loses a great deal of significance when you test its impact over a 30 or 40 year time horizon.

One additinoal question: does your 403b have loan provisions? If so you might consider using this as a source of money for funding a college education for a future child. Also, posted elsewhere is an interest discussion about borrowing against, in that discussion, a 401k account and using that money to fund other investments. It's like creating a virtual margin account, except there are no margin calls. You can't do that with your non-qualified account.

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Author: DW525 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9869 of 76392
Subject: Re: Variable Annuities and 403(b)'s Date: 4/11/1999 10:20 PM
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Thanks for all your help dharmadollars. I'm starting to get a better picture of everything.

Dave

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Author: DW525 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9870 of 76392
Subject: Re: Variable Annuities and 403(b)'s Date: 4/11/1999 10:53 PM
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dharmadollars:

I found this link on variable annuities. Check it out and let me know what you think:

http://www.smartmoney.com/ac/retirement/investing/index.cfm?story=wrongannuities

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9871 of 76392
Subject: Re: Variable Annuities and 403(b)'s Date: 4/11/1999 11:01 PM
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Forbes magazine had an excellent article on variable annuities in February 1998. See,

http://www.forbes.com/forbes/98/0209/6103106a.htm

I looked at these puppies several years ago and decided that the high fees and commissions associated with these schemes make them unsuitable for almost everybody.

intercst

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Author: dharmadollars Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9873 of 76392
Subject: Re: Variable Annuities and 403(b)'s Date: 4/11/1999 11:26 PM
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Now there's a really balanced assessment for you.

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Author: dharmadollars Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9874 of 76392
Subject: Re: Variable Annuities and 403(b)'s Date: 4/11/1999 11:29 PM
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I make them available to my clients with no commission and no surrender charge. There's a changing landscape out there.

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Author: peppermintpatty Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9878 of 76392
Subject: Re: Variable Annuities and 403(b)'s Date: 4/12/1999 7:35 AM
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George - Excellent explanation!

Regards, PP

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