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VAteacher

Low Cost Taxable Or High Cost Annuity?

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Hello,

 

I am a school teacher and my wife and I are in the 33% federal tax bracket. I am maxing out a 403b with Vanguard and will be able to start maxing out a 457 plan each year in addition to that. The problem is, the only 457 plans my school system has on their list include annuities with insurance companies such as AIG-Valic.

 

So, I am trying to crunch numbers and decide whether it will be best to start putting $15,500 a year in a 457 annuity or invest this money in a Tax-Managed International fund I have with Vanguard (in a taxable account). It looks as though the fees for the annuity would be around 2% with Valic, as opposed to .20% with Vanguard in a taxable account. But, the advantage of tax-deferal may outweigh the higher cost incured by going with Valic. This may especially be the case since we are in a high tax bracket.

 

Can anyone refer me to calculators or more information to help decide what path is the best to take? Thanks!

 

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I would first suggest that you read previous articles refered to on the 403(b) side regarding the type of plan you are looking at and the fees associated with it. You might look at lower priced products. If you compare the pre-tax advantage of your plan with pay-as-you-go type of plans earning the same assumed rate of return, then I believe any financial calculator would indicate that the pre-tax plan will out perform an after tax plan when you reach the finish line. Hope this helps!

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Guest Sierra

Hello,

 

I am a school teacher and my wife and I are in the 33% federal tax bracket. I am maxing out a 403b with Vanguard and will be able to start maxing out a 457 plan each year in addition to that. The problem is, the only 457 plans my school system has on their list include annuities with insurance companies such as AIG-Valic.

 

So, I am trying to crunch numbers and decide whether it will be best to start putting $15,500 a year in a 457 annuity or invest this money in a Tax-Managed International fund I have with Vanguard (in a taxable account). It looks as though the fees for the annuity would be around 2% with Valic, as opposed to .20% with Vanguard in a taxable account. But, the advantage of tax-deferal may outweigh the higher cost incured by going with Valic. This may especially be the case since we are in a high tax bracket.

 

Can anyone refer me to calculators or more information to help decide what path is the best to take? Thanks!

 

 

Q.: Why is your school district so, apparently, cost conscious when it comes to the 403b but out to lunch when it comes to the 457? There appears to be a disconnect here. Having said that, the state in which you teach operates a 457(b) Plan for its employees. If it is opened to local school districts, like many State 457 plans are, you should opt for it especially if is of the no-load variety. Please let us know if your state provides this service to you.

 

Peace and Hope,

Joel L. Frank

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