Tax Sheltered Annuities Explained

A Tax Sheltered Annuity can also be described as a 403(b). A 403(b) plan is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers.

Individual accounts in a 403(b) plan can be any of the following types.

? An annuity contract, which is a contract provided through an insurance company,

? A custodial account, which is an account invested in mutual funds, or

? A retirement income account set up for church employees. Generally, retirement income accounts can invest in either annuities or mutual funds.

For the purposes of this website, we’ll focus on the annuity version of a 403(b). Tax Sheltered Annuities (also referred to as TSA’s) may sound complex, but they aren’t much different than other annuities. They are simply a savings program in the form of an annuity, designed to help supplement retirement income.

As mentioned, Tax Sheltered Annuities or TSA is a savings program that allows employees or individuals to make contributions from their pre-tax income and put into a retirement plan.  It is a type of annuity that allows for investment now and receives future annuity or payments for a specified period of time.  If done through an employer, the way TSA works, contributions are deducted before tax; therefore employees enjoy the benefits of accruing pre-tax funds.   The TSA account is taxed only when it is withdrawn or individuals start receiving payment.

There are 5 important reasons why Tax Sheltered Annuities are a great investment:

1. TSA is a savings program that allows additional savings that can be used to supplement retirement income

2. Contributions toward TSA reduce taxable income. Individuals, therefore save on taxes while saving for retirement.

3. Principals and earnings grow tax-deferred.

4. TSA is flexible, low cost and may offer different investment options

5. TSA rolls over to different employers, or providers.

Who can invest in a TSA or 403(b)?

 According to the IRS, the following employees would be eligible to participate in a 403(b) plan.

? Employees of tax-exempt organizations established under section 501(c)(3) of the Internal Revenue Code. These organizations are usually referred to as section 501(c)(3) organizations.

? Employees of public school systems who are involved in the day-to-day operations of a school, such as teachers, administrators, secretaries, etc.

? Employees of certain hospital service organizations.

? Civilian faculty and staff of the Uniformed Services University of the Health Sciences.

? Employees of public school systems organized by Indian tribal governments.

? Certain ministers (not necessarily all ministers)

Why consider a Tax Sheltered Annuity?

A TSA, or 403(b), is the non-profit equivalent of a 401(k). For individuals who are looking to supplement their retirement income, saving and investing in a TSA may be a prudent thing to consider within the framework of a long term plan. Reach out to your employer to learn more about the options available inside of your TSA plan.