AMDG Financial recently joined Aspire’s Financial Advisor Network, making our firm one of several choices to advise employees of five southeast Michigan school districts on their 403(b) plans. We’re excited to do it, because we think everyone should have access to advisers who are obligated to place their clients’ interests first. (Many of the advisers involved with 403(b) plans are brokers or insurance companies that don’t have to meet a fiduciary standard – at least, not yet.)
If you’re a teacher or school staff member with the option of investing in a 403(b) plan, you may feel a bit overwhelmed, so I thought I’d devote this blog post to discussing the ins and outs of 403(b)s, and what you should ask an adviser before setting up a 403(b) plan account.
What is a 403(b) Plan?
403(b) plans are tax-deferred retirement savings plans, not unlike a 401(k) plan. The difference is that 403(b) plans are only available to public school employees, employees of certain nonprofit entities, and some members of the clergy. 403(b) plans enable participants to reduce their taxable income because their contributions to the plan are made “pre-tax,” directly from the person’s salary. While that lowers a participant’s tax bill in the year he or she contributes, the individual will have to pay the tax eventually – after retiring.
Created more than 50 years ago, 403(b) plans are also known as Tax Sheltered Annuities, or TSAs. That’s because when they were first created, annuities were the only investment option. Nowadays, 403(b) plans also include mutual funds and fixed annuities, which may have lower fees associated with them.
In 2016, plan participants under the age of 50 can contribute up to $18,000 per year. After the age of 50, participants can contribute up to another $6,000 per year to “catch up” on their retirement savings if they haven’t saved enough for retirement.
Pros and Cons
Like any retirement plan, 403(b) plans have advantages and disadvantages. One of the biggest advantages is that contributing to the plan reduces your taxable income for the year. (Note that you’ll pay the taxes when you retire and begin to take withdrawals. In theory, you could be in a lower tax bracket by then, which means you would owe less than if you had paid the taxes now.) Another potential advantage is if your employer contributes, or includes a match. If your school district contributes on your behalf, or matches your contributions up to a certain amount, you’d be leaving money on the table if you didn’t participate!
A potential disadvantage of 403(b) plans (and this is also true of 401(k) plans) is that there may be limited choices of where you can invest your money. IRAs typically provide many more options and much more flexibility to invest in stock, exchange-traded funds or mutual funds. In a 403(b) plan, you’re more likely to find fixed annuities, variable annuities and mutual funds, and a smaller menu of choices. In addition, you may pay higher fees for annuities, including surrender fees, which may give you second thoughts about moving your investment to another fund.
How to Get Started
If you’re interested in participating in your school or district’s 403(b) plan, the first step is to educate yourself. For schools and districts using the Aspire Online platform, you can visit www.Aspire403b.com to sign up or contact an adviser for help. Note that Aspire does not endorse or approve the advisers in its network, but simply provides them as choices for plan participants seeking advice about 403(b) plans.
When choosing an adviser, be sure to ask if the person is a fiduciary (obligated to place your interests ahead of his/her own, or those of the firm), and whether the adviser will put it in writing. Also ask about the adviser’s educational background, experience and credentials. Finally, ask how the adviser charges for his or her services, and whether the adviser receives incentives to recommend specific funds. Doing this homework in advance can prevent you from paying the consequences of conflicted advice later.
As always, if you have questions about 403(b) plans, or are seeking an adviser to help you get started on the Aspire platform, AMDG Financial is here to help. We look forward to serving you!