(b)lines Ask the Experts – Advantages of Different Plan Choices

We will assume that, for the purposes of our response when you say “403(b) tax-sheltered annuity” you mean a fixed or variable annuity product offered within a 403(b) plan. If that is not the case, please let the Experts know.   

First of all, a fixed/variable annuity and what is known as a 403(b)(7) mutual fund are merely two types of investment products in a 403(b) plan. A 403(b) plan permits you to save pre-tax; your taxable income is reduced by what you save in the 403(b), and that amount is deducted directly from your paycheck. You do ultimately pay taxes, but not until you retire, when any distributions are taxed in the same fashion as any income you receive. The theory behind the 403(b) as a quality savings vehicle for retirement is that individuals are generally in a lower tax bracket when they are retired than when they are earning the income in the first place as an active employee, so that you’ll save overall on taxes by paying them when the rate is lower.    

But what if you feel that your tax bracket will be HIGHER in retirement for whatever reason, then a Roth IRA might make sense. Unlike a 403(b), contributions to a ROTH are AFTER-TAX (they do not reduce your taxable income). However, when you receive distributions from such an account at retirement, such distributions are completely tax free. So, if your tax bracket is actually higher in your retirement years, paying the taxes now as opposed to later on your retirement savings may make sense. However, there are some disadvantages to Roth IRA, including an income limitation (if you or you and your spouse earn in excess of a certain dollar amount, you may not contribute to a Roth IRA), and lack of deduction from your paycheck (though some providers will offer direct automatic deductions from your checking account).    

As for fixed/variable annuity investments versus mutual funds, as indicated above, they are merely different types of investments within a 403(b) plan. If you have the flexibility to pick between both types of investments within your plan, you should evaluate items such as investment expenses, historic investment returns/performance, and investment risk before investing. The websites of the investment companies offering the investments should provide sufficient information to evaluate the investment selection that would be prudent for you; your employer may be able to provide written materials as well.    

Finally, this is a basic summary of 403(b) and Roth IRA accounts. For more detailed information, you should contact your tax adviser, as this summary is provided for informational purposes only and should in no way substitute for competent tax advice.