taken from the May 2002 AAUP AZ Advocate

Educators Fail to Use Retirement Plan Created for Them

by Thomas Jones, Registered Representative, Financial Directions LLC

Many educators can’t imagine retiring early or building a modest amount of wealth for their retirement. Many fail to plan properly for retirement and don’t understand nor take full advantage of all the programs available to them. It is important to take advantage at the beginning of their careers, when time to retirement is great, and compounded interest can create a large retirement fund out of smaller investments.

Two programs available are the 403(b) and 403(b)7 plans. The 403(b) was created in the 1960’s to encourage savings for retirement. Today roughly $600 billion is deposited in 403(b)’s of which a large percentage is in fixed and variable annuities. However, the law was amended in 1974 to allow investments in mutual funds, 403(b)7's.

Many educators continue to assume that their only option is to use an insurance company’s annuity for a 403(b) plan. However, putting pre-taxed dollars into an annuity is redundant. The nature of an annuity is to defer taxes on investment/savings growth. But, by definition, a 403(b)7 retirement account already allows tax deferral on principle and growth. The IRS code creates tax deferral – there may be no need to combine them. In addition, there are potential additional costs that come with many annuity contracts. The governments’ own regulatory agency, the Securities and Exchange Commission, on its’ website: <http://www.sec.gov> suggests that annuities are not the best vehicle for retirement accounts because of the additional insurance costs, which are a burden on your returns.

The relatively new website, <http://www.403bwise.com>, was created by educators who were disheartened by the lack of information from their employers and abuse by some insurance agents. This site recommends building 403(b) portfolios with no-load mutual funds. This informative site has chat rooms, calculators and suggestions on how participants may enhance their program.

Further tax reforms, created in 2001, have enhanced the value of the 403(b)-type plans in accumulating wealth. As of January 1, 2002, educators are able to:

1) Contribute/defer up to $11,000 in 2002, increasing by $1,000/yr ($12,000 in 2003) until 2006 to a maximum of $15,000.00.

2) This contribution can be up to 100% of compensation (must be less than the elective deferral).

3) A special catch-up provision for those who have never used the 403(b) and have been with the same employer for over 15 years was not repealed. Even when an employee hasn’t maximized their deferral earlier in their careers, they can get the calculations (IRS required) to determine if they can put away an additional $3,000 each year for the next 5 years.

4) If you are at least age 50 by the end of 2002, you can contribute an additional $1000/year, a new catch-up provision.

5) For those in the lower earnings bracket, a non-refundable Tax Credit may be available on the first $2000 of contributions.

6) Rollovers from other qualified retirement plans (IRA, 457, 401K) may now be commingled in ones 403(b) account.

7) Accounts currently held by educators using a fixed or variable annuity can be transferred, but be sure to check for surrender charges and your contract date to help reduce or eliminate penalties.

8) New rules will allow employees to use their 403(b) plan assets to purchase service credits in the Arizona State Retirement System, (waiting for Arizona legislative approval).

What educators need to recognize is that there is a whole discipline affecting their financial security. Do yourself a favor and explore the many viable options and strategies available to you. Coordinating the various components within your long-term plan is essential. Working with an adviser to help define goals and to build a portfolio and monitor the allocation may be in your best interest. But recognize the potential costs (commissions/fees) associated with that service.