If you’re nearing retirement, you may wonder what the best way to save for your golden years is. Should you invest in a 403(b) annuity or mutual funds? Both have pros and cons; deciding which is right for you can be hard. This guide will discuss the differences between these two investment options and help you decide which is the best choice for you!
What Are 403(b) Annuities
Nonprofits and public education institutions can establish tax-sheltered annuity plans, often known as 403(b). They enable participants to invest pre-tax funds in an annuity or custodial account.
- Employee contributions, which are payroll deducted into a TSA 403(b) tax plan, are generally made on a pre-tax basis and are allowed to grow tax-deferred.
- Withdrawals from the plan are taxed as ordinary income.
- TSA 403(b) plans are funded with annuity contracts and a mutual fund platform
- Roth contributions may be allowed and are taxable, subject to specific requirements.
- Earnings on Roth contributions that meet certain requirements are not subject to federal income tax.
- Some plans provide employer match and/or non-match contributions on behalf of plan participants.
- FICA taxes are currently withheld from salary reduction contributions to the 403(b) TSA retirement plan.
403(b) Annuity Benefits
- Principal protection (most contracts)
- Guaranteed income for life
- A guaranteed rate of return
- The ability to earn interest without risk
- Inflation protection
- Avoiding probate and leaving a death benefit to beneficiaries
- Long-term care insurance to pay for a nursing home, assisted living, and home healthcare expenses.
- Taking advantage of Medicaid without going broke first.
Free Tool: 403b Calculator
According to Investor.gov, “a mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio. Investors buy shares in mutual funds. Each share represents an investor’s part ownership in the fund and the income it generates.”
Mutual funds do not grow tax-deferred in the same way as deferred annuities, which means they don’t offset taxes until you take money out of your account.
Employer-sponsored retirement plans like 401(k) usually invest employees’ money in mutual funds.
According to FINRA, Mutual funds are a popular way to invest for retirement because they can offer the diversification, professional management, and certain advantages over purchasing individual stocks and bonds. However, Finra also states investing in a mutual fund involves certain risks where you may lose money.
Mutual Fund Benefits
- Upside potential
- Professional management
Instead of receiving a series of payments, a lump sum payout, or sweeping the interest in an annuity, mutual funds allow distributions in cash, or investors can reinvest the earnings into the fund, making them more significant shareholders.
Investors receive their earnings through dividends, capital gains, and sales of shares.
403(b) Annuity Vs. Mutual Fund At A Glance
|403(b) Annuity||Mutual Fund|
|Access To Principal||Limited liquidity||Liquid|
|Control Over Money||Yes||Yes|
|Can Lose Money||Depends on type||Yes|
|Affordability||Can be expensive||Low Cost|
|Professional Management||Depends on type||Yes|
|Long-Term Care Insurance||Yes||No|
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