Course 203: 403(b) Plans
Alternatives to the 403(b) Plan
In this course
1 Introduction
2 403(b)s versus 401(k)s
3 Handling the Shortcomings
4 Alternatives to the 403(b) Plan

If you can't improve the options in your 403(b) plan, look for a way to get out. That can be difficult, because many annuities will charge you to leave. That's called a surrender fee, and it can lop as much as 7% off your investment. Surrender fees usually vanish after you've been investing in the annuity for seven years, though.

If you can avoid the fee or if you have passed the seven-year mark, consider transferring your money into a 403(b)(7) account. That plan will allow you to invest directly in mutual funds. You can set up a 403(b)(7) account with fund companies, such as Vanguard and Fidelity, and your employer can send your contributions directly to your account.

Maybe you don't want to deal with the hassle of setting up a 403(b)(7) account. If your employer doesn't match your regular contributions, it might make sense to skip the plan entirely.

Individual Retirement Accounts (IRAs) and Roth IRAs offer tax advantages similar to 403(b) plans, and you can pick from practically the entire universe of mutual funds. Their only shortcoming is a lower ceiling for annual contributions.

It might be to your advantage to make the maximum annual IRA contribution, then put the rest of your annual savings in a taxable account. You'd forgo the tax advantages of the 403(b) plan, but a host of tax-managed funds do their best to keep their tax burdens low. If you're restricted to low-return, high-cost annuities in your 403(b) plan, you may do better after taxes with many of these tax-efficient mutual funds.

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