Tax Sheltered Annuity
A tax-sheltered annuity, or TSA, is a long-term
retirement plan that provides a systematic, tax-sheltered way to accumulate funds for
retirement.
If you work for a school or other qualifying tax-exempt organization covered under IRC
Section 501(c)(3) you can accumulate money for your retirement in a special tax-sheltered
plan - a 403(b) Tax Sheltered Annuity.
A TSA reduces your current taxable income
TSA contributions are excluded from your current taxable income and the interest earned or
capital gains credited to your account are tax deferred until you begin to receive
distributions from your TSA. The IRS has created a formula known as the Maximum Exclusion
Allowance which governs the maximum contribution that you may make to as TSA in a given
year.
A TSA offers a high degree of financial security.
TSA's are commonly offered in the form of fixed annuities or equity index annuities. These
TSA's are guaranteed to earn no less than a guaranteed minimum interest rate stated in the
annuity contract. The fixed annuities are backed by the general account of the insurance
company.
Having a TSA doesn't reduce other retirement benefits
You receive TSA benefits in addition to your pension benefits. Social Security credits are
not affected because they are determined by your gross earnings prior to TSA
contributions.
Saving $400 a month in a TSA can save taxes and make your
retirement dreams become a reality
A TSA will reduce your present income taxes. For example in this illustration if you were
earning $40,000 a year and put $4,800 into a TSA, you pay taxes on only $35,200. At a 28%
tax rate, that means you would pay $1,344 less in federal income taxes.
If you add your income tax savings to your regular TSA contributions, you'd have even more money in your TSA and you'd reduce your taxable income again. At a 28% tax rate, that would let you set aside $555 a month with the same take-home pay as you'd have saving $400 a month with a taxable account.
For example, over 10 years, the TSA advantage over a taxable account would come to almost $31,000, assuming a 6.0% interest rate for both, and no withdrawals. Over 20 years, the advantage would be more than $101,000. It's clear, a TSA lets you set aside more for retirement.
A few general rules governing Tax Sheltered Annuities
Generally the maximum annual contribution that you may deduct from your salary is the lesser of 16 2/3 of your gross income not to exceed $10,000. This amount is also known as the Maximum Exclusion Allowance. The formula is used to determine your Maximum Exclusion Allowance takes into account your salary, the number of years you have been employed, prior contributions to TSA's and other "qualified" plans.
In addition to the Maximum Exclusion Allowance calculation there is a "Catch-Up Provision". This provision is available to you if you have been employed by the same employer for 15 years or longer and the maximum contribution under this provision is $13,000.
If, for any reason, you stop contributing to your TSA your money will continue to earn tax-deferred interest. Neither the surrender charges nor the interest rate on your policy be affected. You can then resume your contributions at a later date.
Your beneficiary(ies) will receive the account value of your TSA, penalty free, minus the balance of any outstanding loans. This distribution generally does not have to go through probate and is subject to income tax. You or your beneficiary(ies) may specify how benefits are distributed - in a lumps sum payment, monthly or annual payments or a combination, within IRS limits.
If you change employers, you have the following options:
A TSA can be of benefit to you even if you are retiring in a few years. If you have savings available for current living expenses, you may wish to divert a large part of your salary (subject to IRS exclusion limits) for this short period to take advantage of a TSA's substantial tax benefits. This is an individual decision, however, upon which you should seek competent tax advice.