A Tax-Sheltered Annuity is a type of retirement plan under section 403(b) of the Internal Revenue Code which permits employees of public educational organizations or tax-exempt organizations to make before tax contributions via a salary reduction agreement to a tax-sheltered retirement plan. An individual may only obtain a 403(b) annuity under an employer’s TSA plan.
The contributions to the annuity are deducted from the employee’s income, and as a result, the contributions and related benefits are not taxed until the employee withdraws them from the plan. Because the employer can also make direct contributions to the plan, the employee gains the benefit of having additional tax-free funds accruing.
There is usually a maximum amount an employee can contribute to the plan, however, sometimes there are “catch-up” provisions allowing employees to make additional contributions to make up for previous years where they did not make the maximum contribution.
Some of the benefits of this type of annuity are:
- Tax on the employee and employer contributions is deferred until withdrawal.
- Investment gains in the plan are not taxed until withdrawal.
- Retirement assets can be carried from one employer to another.
- Contributions can be made easily from payroll deduction.
- Flexible plan options are available.
- Saver’s credit may be available under certain conditions and guidelines.
- Better financial security at retirement.
An early withdrawal from the plan would result in taxes and possible penalties. There is a maximum amount you can contribute annually. If you contribute over the maximum amount, every dollar is taxed based on your current tax bracket.
Notwithstanding, the tax-sheltered annuity is a great retirement savings tool because taxes are deferred until you withdraw money from the plan. Your contributions reduce your taxable earnings for the current year, and your investment earnings grow tax-free until you begin to draw an income from them.