Should I put my Ohio Deferred Comp Money into an Annuity?

Should I put my Ohio Deferred Comp Money into an Annuity?

March 15, 2023

Should I put my Ohio Deferred Comp Money into an Annuity?

If you are an employee of a nonprofit public healthcare system or hospital in the State of Ohio, your retirement options look a little bit different than a private sector medical provider. While most people are familiar with retirement saving tools like a 401(k) or 403(b), fewer people are familiar with 457(b) plans, like Ohio Deferred Comp.

A457(b) plan is an employer-sponsored, IRS-sanctioned, tax-deferred savings account allowing you to make pre-tax contributions towards retirement. 457(b) plans are also called deferred compensation plans. A 457(b) retirement plan is similar to a 401(k) or 403(b) plan, in that a 457(b) plan is offered through your employer, and your contributions are taken from your paycheck on a pre-tax basis, which ultimately lowers your taxable income. 457(b) plans are generally available for state and local government employees, as well as certain tax-exempt nonprofits. These plans are very similar to other types of employer-offered retirement accounts. Employees can make contributions up to the annual limit, invest these funds, and grow their retirement nest egg. Like many other retirement savings accounts, contributions to a 457(b) account are made pre-tax, which can lower your overall taxable income for the year. However, this does mean that you’ll need to pay tax on distributions you receive in retirement.

If you work in Ohio, you may have an option between putting your money in the centralized Ohio DC plan or a Qualified Variable Annuity. Variable Annuities are a complex financial product that combines aspects of life insurance and investments. Very often, a Variable Annuity will include sub-accounts, which operate similarly to a mutual fund, and additional optional features known as riders. Each rider and sub-account carries an additional fee, which is combined with the cost to own the annuity, usually referred to as the M&E, or “Mortality and Expense Ratio” and administrative fees. These fees can add up fast.

Investors should also be very careful when choosing riders. Each product has its own set of riders, and the names and descriptions can be very confusing. It is very important to consult the prospectus when trying to understand each rider, as often an investor may think a rider provides a certain benefit when actually it does not. As an example, over the years I have been told by many prospective clients that their Variable Annuity’s rider protects them against investment loss, only to find out the rider does something completely different and unrelated. If you are not careful, you could be paying as much as 1% or more per year for a benefit that does not actually help you in any meaningful way.

Finally, Variable Annuities usually have a time commitment known as a “Surrender Charge”. This means that the money you pay into the Variable Annuity must stay within the account for a period of time, or you will be charged a fee when you withdraw it or close the account. Surrender periods usually span from 5 to 7 years, but maybe longer. Surrender charges may apply to the Variable Annuity on the whole, or to each individual contribution. So even if the account was opened more than 7 years ago, a portion of the cash value could still be subject to surrender charges.

Assessment: When compared to the flexibility and cost of Ohio’s DC plan, and considering the lack of meaningful benefit of a Variable Annuity using 457 contributions, it is RARELY, if ever, a good option for investors.

If you own a Variable Annuity and would like a complimentary review and analysis, please contact Ryan by calling 440-287-5020 or email ing him at

Disclaimer: This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

Contributions to a 457(b) plan may be tax deductible in the contribution year. Distributions are taxed at withdrawal unless rolled into a new employer’s plan or an IRA within 60 days of the distribution. A mandatory 20% federal withholding tax applies directly to distributions taken that could be eligible for rollover.

Variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims-paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value.

Investing involves risk, including loss of principal. No strategy assures success or protects against loss.