** This excellent guest post by David Brown illuminates Tax Sheltered Annuities. Enjoy!
A Tax Sheltered Annuity (TSA) is a kind of annuity which permits an employee to contribute from his income to a retirement plan. The contributions are not taxed until the person decides to withdraw his money from the plan. Moreover, the employer can also contribute to this plan which makes it all the more attractive. Public sector employees and self employed people are the ones who mostly benefit from TSA.
403(b) Tax Sheltered Annuity- The most popular TSA
IRS code 403(b) says that employees of educational institutions, non-profit institutions and self employed ministers can make contributions from their employment earnings to supplemental retirement accounts called tax sheltered annuities. These accounts are tax-advantaged. The Money is taxed only after withdrawal. The employer can contribute to this account but it is not obligatory for him to do so. To enroll, you just need to fill and sign a salary reduction agreement which has the details of the amount of money that will be deducted from your salary for a specific period of time. Initially people were only allowed to invest in annuities but now they can invest in mutual funds as well.
In addition to 403(b) there are other kinds of TSA like 457(b) and 403(a). While 457(b) is about employees of city and state governments, 403(a) addresses self employed people. It is worth mentioning that all the TSA are fundamentally similar.
What are the advantages of TSA?
1. TSA can very well supplement social security benefits. The salary reduction arrangement also makes life easy for people.
2. Tax deferred savings growth makes TSA a very attractive proposition. The money that would have been lost in yearly taxation is now invested and is supposed to generate income.
3. A great thing about TSA is that you can save while reducing taxable income. Since your total taxable income is reduced you may also fall into a lower tax bracket. This means that you will have to pay less money to Uncle Sam in terms of tax.
4. Here the growth of funds is tax-deferred which will ultimately make you quite a bit richer in the long run.
5. Generally speaking, TSA plans offer flexible terms and conditions.
6. You will have full rights over the funds even if you are no longer associated with your contributing employer.
7. Although the maximum annual contribution that can be made to TSA is $11000 but people who are above 50 years of age can make additional contributions upto $5500.
8. Participating in TSA does not reduce the benefits of your other retirement options like pensions or social security.
It should be noted that a 10% penalty will be charged by the IRS in case of premature withdrawal of the funds.
Tax Sheltered Annuities are supposed to act as supplemental retirement programs. Remember that under normal circumstances they are not an alternative to traditional retirement options. However, they can be beneficial to people, especially to people who do not enjoy the post-retirement privileges offered by private sector companies to their employees. TSA cannot provide you shelter from any financial crisis like debt but they can complement your retirement plans and make your future more secure.
Interesting information on Annuity Taxation