Tax Deferred Annuities

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It’s time for you to think about retirement savings. No matter what your age or income, retirement savings should be a part of your financial planning. Fortunately, as a member of the education community, you can take advantage of special savings programs designed especially for you—tax deferred annuities.

A tax deferred annuity is a voluntary program adopted by employers to help their employees provide for retirement. This elective fringe benefit is made available to employees of educational institutions and certain non-profit organizations as described in the federal revenue code(Sec 403b of the Internal Revenue Code, 20 USC 403b) Your 403(b) tax-deferred annuity is one of the best optional retirement funding vehicles available today. You save through payroll deduction, investing pre-tax dollars in the account of choice, reducing your current taxable income. Investment earnings then accumulate and compound on a tax-deferred basis until you retire.

Assuming similar investment plans, tax deferred investment growth performs significantly better than after-tax investment accumulation. The difference between pre and post tax savings increases over time, making tax deferred savings participation particularly important for your long term financial goals. That’s why it is important to begin tax-deferred savings as early as possible.

The retirement investment strategy you select will hinge on a variety of factors including your current age, risk tolerance, how much you can afford to invest, and additional sources of income or assets when you retire.

In addition to retirement savings, the program offers you other benefits as well. Through tax deferral the federal government helps you participate in these plans. For example, if you are in the 30% tax bracket, for every dollar contributed, your taxes would be reduced by 30 cents, resulting in a net personal expense of only 70 cents. You also get another break from the government because as these investments earn interest, they are totally free of tax until you retire or receive distributions.

Another benefit is that many of the tax-deferred savings programs have loan provisions. You can borrow money to purchase a new home, pay college tuition or take care of other expenses. Effective current interest rates for loans originating from qualified 403(b) accounts are typically lower than commercial loan interest rates.

There are two tax-deferred savings options: annuities and custodial accounts (mutual funds). Each savings option has different program features, depending on the company and the choices within that company. Investments can be fixed (guaranteed interest) or variable (value can fluctuate).

A 403(b)(1) tax deferred annuity is contract between you and an approved insurance company.  This contract entitles you to an annuity at retirement based on the amount of money you deposited into that account while employed, plus investment earnings and compounded growth.

A 403(b)(7) custodial account is the mutual fund equivalent of an annuity plan. Mutual fund companies do not offer annuities. Instead custodial account investments are established in mutual funds offering the potential for significant account growth over time.