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My office retirement account is something called a tax-deferred annuity. I was told it's "like a 401(k)," but I thought the non-profit version of a 401(k) was a 403(b). What is this creature? |
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An Annuity is a "container" for an investment to determine how the investment is handled for taxes. They are sold by insurance companies usually. As the name implies, a Tax-Deferred Annuity grows without taxes being taken out until you begin to siphon funds off the Annuity in retirement at which time they will be taxed as ordinary income. Currently as far as I know, there are two types of Annuities, Fixed and Varible. Fixed Annuities use relatively low risk investments, such as bonds for example, and they offer a fixed rate of return over the life of the Annuity. The other animal is the Varible Annuity, which in simple terms is basically one or more mutual funds held within the Annuity. A drawback to Annuities is that there is a fee that is paid to the insurance company that issues the Annuity to cover its administrative costs. So personally I would only use an Annuity when you've maxed out all your other tax-advantaged or tax-deferred options, like 401(K), 403(b), or 457 plan.. along with a Roth IRA and still have money left over for the year you would like to include in retirement. Never put an Annuity inside of a 401(K) or other retirement account because the Annuity already is tax-advantaged, and would be redundant. Many people actually make this mistake. Hope this helps. Welcome to Cash Commons Chaddz3!
(Dec 31 '09 at 06:01)
mbhunter ♦♦
Thanks for having me.. Kind of a neat site. Still learning this stuff myself yet, but I'll help out when and if I can. Shout out to the guy from No Credit Needed for blogging about this place.. Thats how I found it!
(Jan 01 at 10:05)
Chaddz3
Interesting. I am guessing I have the variable version, since I picked a target-date mutual fund for my investments. I'd always avoided annuities before, but the TDA is the only payroll deduction type retirement plan my company offers, so that's why I'm in it. I wish we had a vanilla 403(b).
(Jan 03 at 06:17)
Dogfood Provider
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It is my understanding that a 403(b) is considered a tax deferred or tax sheltered annuity, they are basically different names for the same thing. As an example, IRS publication 571 is entitled "Tax Sheltered Annuity Plans (403(b) Plans)". I think the annuity term comes from the fact that annuities often make up part of the investments options available at places that offer the 403(b), such as schools,hospitals, etc, although I imagine most also offer mutual funds. I would check the paperwork associated with the plan to find out the rules, investment options,but it likely just a different name for a 403(b). |
