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Mutual Funds

At NXT Phase Financial, we have found that many Long Island educators have 403(b)1 plans invested in variable annuity products.  These annuities typically have high fees that can eat into your retirement money.  So, what can you do?  Is there another option available with the possibility of lower costs? 

There are 403(b)7 custodial accounts which invest in mutual funds. 

A mutual fund is an investment that pools money from many participants and invests in stocks, bonds, short-term money-market instruments, or some combination of the three. The combined holdings of stocks, bonds, or other assets that the fund owns are known as its portfolio. Each investor in the fund owns shares, which represent a part of these holdings. 

A 403(b)(7) custodial account allows you, as an eligible employee, to save and invest for your own retirement on a tax-deferred basis. You decide how much money you want deducted from your paycheck and deposited to the account. The contributions and earnings then have the potential to grow tax-deferred until withdrawn. 

You may contribute up to $20,500 yearly to a 403(b) in 2022 and $22,500 in 2023. Of course, you're not required to contribute this much annually if you're unable to. You may set your own contribution rate and adjust it as often as necessary. However, using a percentage of each paycheck is a helpful way to have your contribution grow as your salary grows without you having to adjust it yearly. 

Mutual Funds are considered a great way to diversify your assets.  You can even choose a mutual fund that will automatically change the direction of your investments from a high-risk, high-reward to a low-risk, low-reward option as you near retirement.  These typically go by the name(s), target date, or lifestyle. 

Every mutual fund has an expense ratio. The expense ratio is the percentage of your assets taken annually as payment for a Mutual Fund company to “manage” the Mutual Fund. The average expense ratio for actively managed mutual funds is between 0.5% and 1.0%.1 They rarely exceed 2.5%.   For passive index funds, the typical expense ratio is about 0.2%.2 As you can see, these fees do not include the M&E fee typically charged by variable annuities. 

Withdrawals are permitted without penalty at age 59½ or in the event of the death or disability of the participant. Availability of early withdrawals and taxation are generally outlined in the plan document. Required minimum distribution (RMD) rules do apply to 403(b)(7) custodial accounts. 

If you are interested in speaking with John Carbonara to review your present 403(b) plan, you can book an appointment below using his online calendar.  This is a complimentary service to educate and increase awareness.  We look forward to hearing from you.

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