What are Tax Sheltered Annuities?

Answer:
Tax sheltered annuities are also known as 403(b) plans

and TSAs. They are a type of retirement plan for employees of tax-exempt schools or organizations. Employees contribute funds into the tax sheltered annuities on a before tax basis which reduces their current taxable income. Employers also can contribute to a 403(b) plan on behalf of the employee.

The Internal Revenue Code section 403(b) makes tax sheltered annuities possible. By reducing current taxable income, the participants’ income tax is reduced for the year in which the contributions were made. In addition, the funds in the tax sheltered annuity grow tax deferred. Taxes are not due until withdrawals are made.

As a qualified retirement plan, tax sheltered annuities have limits in place including contribution limits as well as early withdrawal penalties. Withdrawals are allowed under certain circumstances including: financial hardship, termination of employment, death or disability, and reaching age 59 ½.

In practice, tax sheltered annuities work in much the same as 401K plans. Employees contribute using pre-tax dollars and often receive a company match. Various investment options are usually available allowing participants to pick funds that match their investment goals and risk tolerance.


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