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Dr. Don TaylorRetirement accounts


Dear Dr. Don,
I recently joined a retirement plan through my employer, a 403(b) annuity. Is this a good idea? How does it differ from a 401(k) plan, and how do you contribute to a 401(k) if it is not offered from your employer? Which plan would bring a better investment return? Thank you. -- Karen Kale

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Dear Karen,
The two types of tax-deferred retirement plans, 401(k) and 403(b), are named by the section of the Federal Tax Code that establishes the plan. For-profit businesses aren't able to offer 403(b) plans. They were developed for nonprofit organizations, like schools, hospitals and government.

The differences between the two types of plans has blurred over the years. Historically, 403(b) plans were called tax-sheltered annuities, or TSAs, and plan participants were often limited to investing in annuities. Today, investing in an annuity isn't likely to be the right choice for your 403(b) plan contributions.

One difference between the two plans is that many private employers offer some level of matching contributions in 401(k) plans, and matching contributions are seldom offered in 403(b) plans. Another is that 403(b) participants can't invest in individual stocks.

Your employer has to sponsor a retirement savings plan for you to participate. If no plan is available, your tax-advantaged retirement investment options are limited to eligible contributions in either an IRA or Roth IRA. The good news here is that the Bush Tax Bill increases contribution limits in these accounts over the next several years.

Investment returns are dependent on what investments are available to plan participants. A pervasive problem with both types of plans is that the company or organization doesn't have the same goals as the employee when choosing the investment firms and products available to employees in these plans.

Sales loads, fees and high annual expenses can negate a lot of the tax advantages associated with investing in these plans. If you review your investment choices and can't get comfortable with the investment advice provided or the investment products available to you, then lobby your employer for more choices.

Most people have financial goals they want to achieve besides retirement. Retirement planning is just one part of personal financial planning. That said, the earlier in your working career that you start saving for retirement and the more you can contribute to that retirement account, the easier it will be to reach your retirement goals.

-- Posted: Aug. 31, 2001




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