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Tax Sheltered Annuities (TSAs)

Published: February 12, 2016 Categories: Annuity Education, Finance, General Interest

A Tax Sheltered Annuity, also called a TSA or 403(b), is a retirement plan offered by public schools and certain 501(c)(3) tax-exempt nonprofit organizations. Section 403(b) of the Internal Revenue Code allows employees to save for their retirement by making pre-tax contributions, up to a pre-defined annual limit, to individual accounts. Employee contributions are usually accomplished by specifying an amount or percentage that they would like to have withheld from their paychecks and directed to their tax sheltered annuity account. Employers can also contribute to employees’ accounts. In addition to the pre-tax contribution benefit, funds contributed to tax sheltered annuities enjoy tax-deferral until withdrawn, which typically occurs post retirement.

When withheld funds are directed to a tax-sheltered annuity (TSA), the employee will usually have the opportunity to select the investment product that they would like to have their money allocated to, from a list of products that have been pre-approved for inclusion in the plan by their employer. With regard to annuity products, choices commonly include multi-year guarantee annuities which earn a fixed and steady rate of interest over time and fixed indexed annuities which tie their interest earnings to the performance of a particular stock market index, without the downside risk.

When TSA plans were originally introduced, plan participants were specifically limited to a selection of annuity products, because the choice of an annuity was mandated by law. While annuity products still remain the most popular option among tax-sheltered annuity plan participants, in 1974, the Employee Benefit Income Security Act (ERISA) broadened the allowable choices to include mutual funds.

Tax sheltered annuity plans are considered supplemental retirement accounts because they are not intended to replace other more primary retirement plans. For example, many public school employees are eligible for and participate in state government pension plans. TSA plans are intended to allow those employees the opportunity to defer and save additional funds on a tax advantaged basis for their retirement, not as a substitute for, but rather supplemental to their pension plan.

Tax sheltered annuities are also designed to be portable, meaning that upon separation of service or retirement from an employer, TSA accounts can be rolled over to an individual retirement account (IRA) or other qualified retirement plan. This is the area where the Specialists at AnnuityAdvantage can provide significant assistance, guidance and direction. If you own a TSA account and have recently separated from service from your employer or are planning to retire in the near future, please give us a call. We would be happy to provide additional information and details, as well as answer all of your questions without any hype or sales pressure. And, there are never any fees, loads or sales charges for our services.