403b Plans And What Teachers Need To Know - YouTube

Hi everyone, David Waldrop here with the Astute Advisor personal finance site.

Today we're gonna dive right into 403(b) plans and cover what you need to know.

What is a 403(b)?

403(b) plans were first introduced roughly 50 years ago, and they are sometimes called

Tax Sheltered Annuities, or TSAs for short.

Long ago, annuities were the only investment option available.

Annuities are offered by insurance companies and insurers got heavily into the 403(b) market

many years ago.

So a lot of the terminology is still based on how things were years ago, years ago.

It was automatic that if you had a 403(b), you had an annuity offered by an insurance

company.

Obviously, a lot has changed since then, but sometimes, they're still referred to as TSAs.

What you wanna remember is that you may be talking about a 403(b), you might hear it

referred to as a TSA, and in fact, it may not even be invested in an annuity.

So if that's not confusing enough, there's plenty of confusion to go around with these

retirement products, and even the name and how they're referred to is confusing.

Are you investing in annuity or a mutual fund?

It can be very hard to distinguish between the two.

They look very similar.

I can't tell you how many times I've had a client say they're investing in mutual funds

within their 403(b)< only to discover they are in fact investing in an annuity, and while

you may have exposure to something that looks like mutual funds, for example, it might say

Vanguard SMP 500, that may in fact not be a mutual fund, but instead be a annuity sub-account,

and that may sound like splitting hairs, but there is a big difference between the two.

Annuities have surrender fees and mortality and expense fees.

Surrender fees are where you invest in the annuity contract to get exposure to the annuity

sub-accounts that look like mutual funds, and then, guess what, if you change your mind

and you decide that that annuity company or life insurance company isn't the right fit

for you, or you wanna move into a different product, and you wanna close out your 403(b)

with them and go with somebody else, that's surrendering your annuity, and people are

very often surprised to know that surrender fees can be significant.

I've seen surrender fees upwards to 10 years.

I've seen them anywhere from 4 to 10.

I'm sure there's probably worse out there, but basically, what that means is if you decide

within the first two years that you don't wanna be in that annuity anymore and you wanna

move in a different direction, you're gonna have to pony up and pay some serious surrender

charges.

I've seen them as high as 8 to 10 percent, so that's no joke.

Mortality and expense fees, that's what the insurance company is charging to be able to

pay for the costs that they incur when someone passes away and they've got to do some of

their annuitization on some of their other products, so those fees go to making sure

that the insurance company is stable and able to pay out their claims.

Mutual funds have fees as well, but they are not part of a variable annuity.

If you're investing directly in mutual funds, you can do so via load funds or no load funds.

All that means is that a load is where you're paying a commission to a sales broker to tell

you about the product, and then they sell you a particular product.

You're gonna pay a load.

Sometimes a load can be upwards of five percent to get into your mutual fund.

You can also invest on your own, and be in no load funds.

There's plenty of mutual funds that you can invest on your own and not pay any load.

Sometimes, load and commission are used interchangeably in terms of terms.

They are a little bit different, but you might hear "no load" or "load" referred to as commission-free

versus commission.

Are Roth contributions allowed?

Roth contributions are made with after-tax dollars.

So whenever you're putting money into a 403(b), you're doing so via your salary that you receive.

Roth contributions are made with the after-tax dollars, and the way that you wanna think

about this is you can compare it to what are known as traditional contributions.

Traditional contributions, the way it had worked for many, many, many years, is that

when you contribute to a 403(b), you're doing so via your salary, and you're reducing your

salary that goes toward reducing your taxable income.

Those are traditional contributions.

Those are known as pre-tax.

So you're putting money into a 403(b), you're reducing your taxable income, and then later,

much later down the road when you go to make withdraws from your 403(b), then you're gonna

be taxed on whatever you pull out.

Well, with Roth contributions, you're putting that money in after the tax has already been

applied, so you're not reducing your taxable income each year.

You are not saving on taxes each year by making Roth contributions.

Well, some of you might be thinking, "Well, that's no good, I wanna save on taxes."

Well, you do, but you wait 'til many years down the road, until you are withdrawing and

the money that you pull out of the Roth portion of your 403(b) is going to be tax-free.

So there is a big difference between the two.

Now whether or not you should be putting money into the Roth portion or the traditional.

There's a lot of variables to that, we can't get into all of it here.

I've got plenty of information on my website that goes into some of the pros and cons,

but in general, you wanna consider how many years you have to go until you're going to

be retired.

You've got many years to go until you're going to be retired, you may be better off allocating

some dollars to the Roth portion of your 403(b).

Now you have to remember that if you've got two or three years left to go until your retirement,

you're probably not going to see as much of an advantage by putting money into the Roth

portion as someone that is putting money in there for 15 to 25 years.

Who contributes to your 403(b) plan?

Accounts are funded with contributions directly from your salary.

So you are making contributions to the plan with your own dollars.

In 2008, those that are under age 50 can contribute 18,500 per year.

Those who are age 50 or better can contribute an additional 6,000 dollars, and that's known

as a catch-up.

So if you're age 50 or older, you can contribute an additional 6,000 dollars.

If you are contributing those dollar amounts, that is a sincerious annual contribution.

A lot of people, in fairness, can't hit those numbers just based on their budget, but if

you can, all the better.

You're gonna reduce your taxes significantly and be able to sock away a lot of money in

your 403(b) for your retirement.

What happens to your 403(b) if you leave your employer, and this is a question that I hear

a lot.

A lot of times, people are just apprehensive to put money away in something that they don't

know whether or not they're gonna be able to take it with them or what they do with

it, but in general, if you leave your employer, you can roll over to a new 403(b) with a new

employer.

Maybe you've gone to a new school district, you very oftentimes can do a rollover from

your old 403(b) plan into the new one.

Whether or not that's gonna be the best situation for you, we don't have the time to answer

that here, but you do wanna consider things like costs for the new 403(b) plan, because

you're gonna be weighing that decision on whether you should just simply roll over to

your own individual retirement account, also known as an IRA.

So whatever you do, you need to have confidence that you can put money away into a 403(b)

plan, but if you change jobs or something happens with your employment, you are able

to take that money with you.

However, whether or not you can spend that money on other things other than retirement

based on your age, that's a totally separate question.

Generally, if you withdraw money from a 403(b) and you're not retired, you're gonna be either

paying tax, penalties, or both.

Is your advisor putting your interests first?

Does your advisor earn sales commissions if you invest?

The only way that you're gonna know that is if you ask questions.

Because there are a lot of financial professionals that don' have to tell you how they're compensated.

In some really bad cases, there are advisors who have said that they don't make anything,

which is not exactly true.

They might phrase it as, "You can invest in this 403(b) contract, and you don't have to

pay anything.

If you put in 10,000 dollars, 10,000 dollars gets invested."

That may be true, but that doesn't mean that the advisor that sold it to you is not getting

a commission.

So you really need to know what the motivations are, and I'm not suggesting that financial

salespeople that earn commissions are bad, I'm just saying that that's not the only way

that you have to go.

You can work with an advisor who is held to the fiduciary standard when working with clients.

That means they're required by law to put your interests first, and that's a big difference.

Fiduciary advisors have a lot more requirements of what they need to disclose about how they're

compensated.

So if you're working with a fiduciary advisor, you're probably not gonna ask, or need to

ask how they're compensated because a fiduciary advisor should be telling you that on the

front end.

So again, I'm not suggesting that fiduciaries are better than financial salespeople, but

you need to understand that there is a difference.

Not all advisors are stockbrokers, not all stockbrokers are fiduciary advisors.

There's a big difference, and the way to get there is to be asking questions.

Please be sure to like this video and hit the subscribe button.

For more information on 403(b) plans, you can visit my personal finance site, The Astute

Advisor.

We go into a lot more detail on the blog about these retirement plans and many others.

We're gonna be doing a lot more of these, so I wanna hear back from you.

Leave a comment, tell me what you like, tell me what you didn't like, and give me suggestions

on other personal finance topics that you might hear about, and we'll make sure we get

them uploaded very soon.

Until next time, have a great one.