Tax-Sheltered Annuities
A tax-sheltered annuity (TSA), also known as a tax-deferred annuity or 403(b) retirement plan, is a form of deferred compensation arrangement that helps certain types of employees to save for retirement. Only the following employees can participate in a TSA:
- employees of public educational systems
- employees of tax-exempt charitable organizations (e.g. nonprofit religious organization, hospital, museum, or zoo)
- self-employed ministers
- employees of Indian tribal governments
Most TSAs are funded primarily by an employee's contributions through a salary reduction agreement with an employer. A fixed amount of money is deducted from each paycheck before taxes are taken out. The TSA contributions also get to grow on a tax-deferred basis. The maximum amount that an eligible employee can contribute to a TSA each year is the same as for 401(k) contributions. A TSA participant can elect to contribute an annual maximum of $17,500 in 2013 and in 2014.
A TSA may also be partially funded by contributions from the employer. The employer may make matching contributions or contribute a fixed percentage of an employee's compensation to the TSA.
A TSA can be used by an employer to supplement the benefits provided under the employer's qualified retirement plan or simplified employee pension plan (SEP). However, a TSA cannot be maintained if an employer maintains a SIMPLE 401(k) or SIMPLE IRA (and vice versa).
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A TSA may provide a limited amount of life insurance protection for an employee's beneficiaries. In some cases and within limits, a TSA participant may also be able to borrow money from the TSA. The borrowed money, however, has to be repaid.
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There are three ways to set up a TSA to provide retirement benefits. Although they share common elements, each type of TSA has its own specific requirements. TSAs can be set up as:
- annuity contracts
- custodial accounts
- retirement income accounts for churches
Distributions. The distribution rules for TSAs are generally the same as those for 401(k)s and other qualified plans. An exception is that, unlike 401(k)s, distributions on account of plan termination are not allowed.
Rollovers between (to and from) TSAs and other qualified plans, like a 401(k), an IRA, or a 457 government plan, are allowed.
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