posted on 09-05-2019

Tax-Deferred Annuity (TDA)

Updated September 5, 2019

What is a Tax-Deferred Annuity (TDA)?

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 a TDA Plan Works

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.

Note: The basic salary deferral maximum for 2019 was $19,000 (in 2018 it was $18,500).

Why TDA Plans Matter

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. Throughout 2015 to 2019, the Age 50+ catch-up contribution limit was $6,000. 
  • 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 When money is withdrawn it is taxed as regular income.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.