What is a Tax-Sheltered Annuity (TSA)?
A tax-sheltered annuity (TSA), also referred to as a tax-deferred annuity (TDA) plan or a 403(b) retirement plan, is a retirement savings plan for employees of certain public education organizations, non-profit organizations, cooperative hospital service organizations and self-employed ministers.
How Does a Tax-Sheltered Annuity (TSA) Work?
The employer makes payments to the plan through a salary-reduction agreement.
The employee personally makes payments to the plan.
The employee makes payments to the plan and the employer matches these payments.
In 2010 the basic salary deferral limit was $16,250.
Why Does a Tax-Sheltered Annuity (TSA) Matter?
TSA plans consist of benefits that set them apart from a 401(k):
Age 50 + Catch-Up: Participants who are 50 years old and older are eligible to make additional annual contributions to the TSA plan starting from the year they turn 50. If a participant is already contributing the maximum amount to his/her plan, then he/she may also be able to contribute more with Catch-Up Contribution. In 2004, the Age 50+ catch-up contribution limit was $3,000. That amount increases to $4,000 in 2005 and $5,000 in 2006.
Lifetime Catch-Up: This provision is available to employees with least 15 years of service, and allows participants to contribute up to $3,000 in addition to the normal contribution limit if they have previously contributed less than $5,000 a year to the plan on average. The lifetime limit for the catch-up provision is $15,000.
Taxes and Distributions: Taxes on tax-sheltered annuity plan contributions and earnings are not levied until the plan owner withdraws money from the plan. This money is taxed as regular income. Typically, withdrawals are not made until the plan owner is at least 59 ½ years old. If the plan owner makes a withdrawal before their retirement age, then he/she will have a 10% penalty payable to the IRS (unless special circumstances apply).
Investment Options: Unlike in 401(k) plans, TSA plan participants are not permitted to invest in individual stocks. Investment options specific to TSA plans include annuity and variable annuity contracts with insurance companies, custodial accounts consisting of mutual funds, as well as retirement income accounts for churches.