What Forms of Investment are Available?

The law permits TSA contributions to be placed in a fixed dollar annuity, a variable annuity, or a 403(b)(7) custodial account. Fixed and variable annuities are offered by life insurance companies, while 403(b)(7) custodial accounts are sponsored by mutual fund organizations.

Many participants choose a fixed dollar annuity. The fixed dollar annuity is popular because it is thought to be the safest and simplest of the three alternatives. The insurance company receives the contributions on your behalf, invests them, usually in bonds and mortgages, and credits you with interest on your money. The company must absorb any investment losses and may not pass them directly along to your account. What you receive is interest on your money, and in that respect a fixed dollar annuity is similar to a savings account at a bank. It is, however, a tax favored savings account.

A variable annuity is more complex than a fixed dollar annuity. Variable annuities offer a choice of investment alternatives ranging from fixed accounts to growth stocks, income stocks, bond funds and so on. With a variable annuity you bear the investment risk, while with a fixed annuity the risk is borne by the insurance company. If you are in a variable annuity growth stock fund, for example, and the stock market goes up sharply, you stand to earn more than you would that year in a fixed dollar annuity. On the other hand, if stocks go down, you must accept the loss.

A 403(b)(7) custodial account is nothing more than a mutual fund selected by you from a range of choices offered by your employer. There are many mutual funds from which to select, ranging from conservative, low-yielding money market accounts, to high risk small company growth stock funds, to junk bond funds – anything which you might be interested in investing is probably available. Naturally, you accept all investment losses and you get to keep any gains.

Previous | Next
Beginning | End

Updated: Monday, December 03, 2007 11:51:36 PM  Eastern