Current Pension Topics
Make 90-24 Switch in 2007

By JOEL L. FRANK

Many of you use Section 403(b) of the Internal Revenue Code for your pre-tax investing. I also know that many of you who have a 403(b) are paying much too much in fees. Additionally, you may have an insufficient number of investment options. The point being, you are not happy with your 403(b) arrangement.

Mr. Frank is a fee-only Retirement Financial Planner. He can be reached by telephone at (732) 536-9472, or via e-mail at rollover@optonline.net.

Back in 1990 the Internal Revenue Service addressed your concerns by issuing Revenue Ruling 90-24. The ruling is permissive, not mandatory. This means the employer is not compelled to honor your request to move your money, but most do. The ruling allows you to transfer, tax-free, your 403(b) investment with one company to another 403(b) investment with another company. It must be emphasized that the ruling pertains solely to Section 403(b) investments/accounts; it has nothing to do with Individual Retirement Accounts (IRA) or Sections 457(b) or 401(k).

Under this ruling, a 403(b) investor can transfer his/her money regardless of age or employment status. Some 403(b) issuers claim that they have never heard of such authorization and are telling their investors they must wait until age 59-1/2 to effectuate a "rollover." This is not true. A copy of Revenue Ruling 90-24 may be downloaded at: http://www.taxlinks.com/rulings/1990/revrul90-24.htm . You may want to distribute copies to your colleagues, as well as your 403(b) commissioned rep. Tell him or her to get with the program.

The unique nature of the Revenue Ruling 90-24 is drawing to a close. Revenue Ruling 90-24 allows the transferred funds to be invested in any other Internal Revenue Code (IRC) Section 403(b)-approved investment. The approved investments are annuities, under Section 403(b)1 and mutual funds under Section 403(b)7. The successor 403(b) investment you personally select does not have to be approved by the employer.

All this is about to change on Jan. 1, 2008. The new 403(b) Regulations go into effect on that day, and as far as a Revenue Ruling 90-24 transfer of funds is concerned, you will be forced to select a 403(b) investment from your employer's approved vendor list. So please, in your own best interests please effectuate your Revenue Ruling 90-24 transfer before next January, or you may very well be stuck with a lousy 403(b) investment.

Even though the IRC allows you to use annuities for both pre- and post-tax investing, you should not use them at all. Having said that, the tax advantage of using an annuity for post-tax investing is that while the investment/contribution is made with post-tax dollars, the gains/interest are tax deferred. But with pre-tax investing you do not need to invest in an annuity in order for the investment/contribution to be tax-deferred. As we all know, mutual funds can be used. So if this is the case, why are more than half of all variable annuities sold to investors and placed inside of pre-tax retirement investment accounts like IRAs, 403(b), 457(b) and 401(k)? This is the result of massive marketing campaigns. The variable annuity is sold, not bought. In my view, placing variable annuities inside already tax-deferred retirement accounts should be illegal. I'm especially sad that Teachers are often the targets of this deception by their very own unions that enter into endorsement agreements with these vendors of variable annuities. Such an endorsement agreement has recently been declared illegal by the Attorney General of the State of New York.

To know more about why you should stay clear of annuities, I encourage you to log onto:
www.fundadvice.com/index.php?option=com_content&task= view&id=864&Itemid=46 .

I have a message and summer homework assignment for all public school employees in this state outside of the city. If you contribute to a 403(b) annuity, please stop and open up an account with the Deferred Compensation 457(b) Plan of the State of New York. This no-load pre-tax savings/investment plan is one of the great ones and is available to you as well as every other public employee in the state. But it is not going to come to you! You must take the first step and ask your employer for it. No public employee in this state should be forced to use a variable annuity for pre-tax investing. Please contact me if you do not have a no-load/no-commission choice for pre-tax investing.

Mr. Frank is a fee-only Retirement Financial Planner. He can be reached by telephone at (732) 536-9472, or via e-mail at rollover@optonline.net .