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As a school employee, a 401k isn't avaialable to me, but a 403(b) is, which to my understanding is similar to a 401k. On the other hand, the term "tax-sheltered (or deferred) annuity" seems to be used somewhat interchanagbly when talking about a 403(b). Maximizing a 401k is emphasized, but a variable annuity isn't. To my understanding I can't invest directly in stocks through my 403(b) (though I do in my IRA), so I have no choice but to invest in mutual funds. And since I can only invest $2000/yr in an IRA, doesn't it make sense to invest in a 403(b)/TSA so that I can invest $10,000/yr tax-deferred, as opposed to investing that money directly in stocks that I will have to pay taxes on?

I believe that most 403(b) plans are written through insurance companies as annuities. Not all annuities are bad, as is sometimes implied. As long as the fees are really low, they aren't so bad. In 403(b) plans you are, by law, limited to mutual funds or annuities. 403(b)7 plans invest only in mutual funds. Your school may or may not offer 403(b)7 plans, but it's worth checking into if you do not want an annuity. I found out by accident that our school has something like 20 different companies to choose from, and although the vast majority were annuities, I chose Fidelity with a 403(b)7 in mutal funds w/o annuities. Someone might correct me if I'm wrong, but I was told that there is no loan provision with a 403(b)7. Might make a difference if you want to use some of that money to buy a house later on.

My take on the Foolish investment strategy would be to first invest your $2,000/year into the IRA where you can buy stocks according to your favorite method(s) (Foolish Four, Rule Maker, Rule Breaker, throw darts at financial page, etc). This also make sense since you probably don't get any matching funds. After funding the IRA, then put money into the 403(b), probably an S&P 500 index fund, since over the long term (and usually the short term!) they beat 80-90% of managed mutual funds.

How much to put into the 403(b)? Depends on how much you want the tax-deferal, and if it is worth waiting to pay the taxes after you retire, and what kind of returns can you get in a taxable account with a discount broker. Buy and hold strategies result in a long-term capital gains taxes, which may be significantly lower than income taxes on traditional IRA and 403(b) withdrawls after retirement. Some of it depends on how much you want the tax deferal now, or if you want a lower tax bill later.

Hope this helps and wasn't too unorganized,

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