Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Tax-Deferred Annuity (TDA)

What it is:

A tax-deferred annuity (TDA), commonly referred to as a tax-sheltered annuity (TSA) plan or a 403(b) retirement plan, is a retirement savings plan available to employees of certain public education organizations, non-profit organizations, cooperative hospital service organizations and self-employed ministers. 

How it works (Example):

Organizations offer tax-deferred annuity plans to eligible employees for long-term investment growth, similar to a 401(k) plan. Contributions to these plans are generally in one of three forms:

    The employer makes contributions to the plan through a salary-reduction agreement.

    The employee makes contributions to the plan.

    The employee makes contributions to the plan and the employer makes a matching contribution.

In 2010 the basic salary deferral maximum was $16,250.

Why it Matters:

TDA plans offer many benefits that distinguish them from a 401(k):

     Age 50 + Catch-Up: Participants who are age 50 and over are eligible to make additional annual contributions to the 403(b) plan beginning in the year they turn 50. If a participant is already contributing the maximum amount to his/her 403(b) plan, then he/she may also be able to contribute even more using the Catch-Up Contribution. In 2004, the Age 50+ catch-up contribution limit was $3,000. That figure increases to $4,000 in 2005 and $5,000 in 2006.

    Lifetime Catch-Up: This provision is available to employees who have completed at least 15 years of service, and allows participants to contribute up to $3,000 on top of the regular contribution limit provided that the participant contributed an average of less than $5,000 a year to the plan previously. The lifetime limit for this catch-up provision is $15,000.

    Taxes and Distributions: Taxes on tax-deferred annuity plan contributions and earnings are deferred until the plan owner makes a withdrawal from the plan. When money is withdrawn it is taxed as regular income. Withdrawals are usually not made unless the plan owner has reached the age of 59 1/2. If the plan owner withdraws money from the account prior to their retirement age, then he/she will incur a 10% penalty payable to the IRS (unless special circumstances apply).

    Investment Options: Unlike in 401(k) plans, TDA plan participants are not allowed to invest in individual stocks. Investment options specific to TDA plans include annuity and variable annuity contracts with insurance companies, custodial accounts consisting of mutual funds, as well as retirement income accounts for churches.

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