How to Choose a Vehicle for Your 403(b) Retirement Plan

A 403(b) retirement plan allows employees of certain tax-exempt organizations to save for retirement.

Instructions

Difficulty: Moderately Easy

Things You’ll Need:

• A list of 403(b) vehicle options
• Paperwork from the chosen company

1. Obtain a list of 403(b) vehicle options from your employer. These can include variable annuities, investment options from companies such as Merrill Lynch, or mutual fund families like Vanguard and Fidelity.
2. Pay special attention to any individual funds on the list. Direct investing through them can save you thousands of dollars in fees, loads and commissions.
3. Call the fund families, annuities or investment companies you're considering in order to determine which mutual funds they offer in their 403(b) plans.
4. Ask for a detailed account of all fees, commissions, and front or back loads (entrance or exit fees) you'll be charged.
5. Select the 403(b) vehicle that offers the best choice of investments at the lowest cost (combined fees and commissions).
6. Decide on the funds you want to own within the 403(b) vehicle and the percentage of your monthly contribution you want allocated to each.
7. Obtain the appropriate paperwork from the company you've chosen, fill it out and submit it to your employer.

Tips & Warnings

• Unlike 401(k) plans, 403(b) vehicles are limited to mutual funds only, rather than individual stocks.
• Each contribution to your 403(b) account reduces your taxable income by the amount of your contribution.
• Direct investing with a mutual fund family is your best choice because it enables you to eliminate unnecessary fees and commissions.
• A 403(b) is already tax-deferred; you don't need to house it in an annuity to get this benefit.
• There is an abundance of no-load mutual funds with excellent performance records; whichever vehicle you choose, make sure it offers no-load choices.
• You may change the allocations within your 403(b) vehicle, usually without any penalty.
• You can't withdraw money from your 403(b) vehicle before retirement or age 59 1/2 without paying a 10 percent penalty to the Internal Revenue Service. Choose your vehicle and contribution amounts carefully.
• Annuities lock you in for 10 years by imposing stiff early-exit penalties.
• Be aware of fees and commissions. Remember that a small 1 percent annual fee can cut your return by 40 percent over 30 years due to compounding.
• Withdrawals from your 403(b) are taxed as ordinary income.