What is a 'Tax-Sheltered Annuity'

A tax-sheltered annuity (TSA) allows an employee to make contributions from his income into a retirement plan. The contributions are deducted from the employee's income and, as a result, the contributions and related benefits are not taxed until the employee withdraws them from the plan. Because the employer can also make direct contributions to the plan, the employee gains the benefit of having additional tax-free funds accruing.

BREAKING DOWN 'Tax-Sheltered Annuity'

In the United States, one specific tax-sheltered annuity is the 403(b) plan. This plan provides employees of certain nonprofit and public education institutions with a tax-sheltered method of saving for retirement. There is usually a maximum amount that each employee can contribute to the plan, but sometimes there are catch-up provisions that allow employees to make additional contributions to make up for previous years when they did not make the maximum contribution.

Comparing TSAs to 401(k) Plans

TSAs are often compared with 401(k) plans. Their biggest similarity is that they both represent specific sections of the Internal Revenue Code that establish qualifications for their use and their tax benefits. Both plans were designed to encourage individual savings by allowing for pre-tax contributions towards accumulating retirement savings on a tax-deferred basis.

From there, the two plans diverge. 401(k) plans are available to any eligible private sector employee who works for a company that offers the plan. TSA plans are reserved for employees of tax-exempt organizations and public schools. Nonprofit organizations that exist for charitable, religious or educational purposes and that are qualified under Section 501(c)3 of the Internal Revenue Code are eligible to offer TSA plans to their employees.

Contribution Limits

Contributions to TSAs are capped at the same level as contributions made to 401(k) plans and include a catch-up provision for participants over age 50. TSAs also include a lifetime catch-up for participants who have worked for a qualified organization for 15 years or more and whose average contribution level never exceeded $5,000 over that period of time. Including the contribution, catch-up provisions and an employer match, the total contribution cannot exceed 100% of earnings up to a certain cap.

Withdrawals

All qualified retirement plans require that withdrawals commence only after the age of 59 ½. Early withdrawals may be subject to a 10% IRS penalty unless certain exemptions apply. Withdrawals are taxed as ordinary income, and the IRS requires that they commence no later than the age of 70 ½. Depending on the employer's or plan provider's provisions, employees may be able to access funds prior to age 59 ½ via a loan. As with most qualified retirement plans, withdrawals may also be permitted if the employee becomes disabled.

RELATED TERMS
  1. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt ...
  2. Employee Contribution Plan

    A company-sponsored retirement plan where employees may elect ...
  3. Withdrawal Benefits

    The rights of an employee who has a qualified pension plan to ...
  4. 401(k) Plan

    A qualified plan established by employers to which eligible employees ...
  5. Withdrawal Credits, Pension Plan

    The rights of an employee who has a qualified pension plan to ...
  6. Savings Incentive Match Plan For ...

    A retirement plan that may be established by employers, including ...
Related Articles
  1. Retirement

    Why are 401(k) contributions limited?

    Find out why contributions to 401(k) retirement plans are limited, including what the current contribution limits are and how limits encourage participation.
  2. Small Business

    Plans The Small-Business Owner Can Establish

    Don't hesitate to adopt a smart plan for you and your employees.
  3. Retirement

    401(k) Contribution Limits in 2016

    Find out what the contribution limits are for 401(k) retirement savings plans in 2016, including individual, employer and aggregate limits.
  4. Retirement

    5 Lesser-Known Retirement And Benefit Plans

    These plans aren't widely used, but they fill a specific niche for employees in certain situations.
  5. Retirement

    5 Companies With the Best Retirement Plans

    Ever wonder how your company retirement plan stacks up against the country's best employers? Take a peek at these great retirement plans.
  6. Retirement

    What's a Defined Contribution Plan?

    A defined contribution plan is a company retirement plan that specifies the amount of money contributed to it.
  7. Financial Advisor

    Understanding Rules on Defined Benefit Pension Plans

    Defined benefit plans offer advantages to both employers and employees. Employers must understand the federal tax rules when establishing these plans.
  8. Retirement

    Is a SIMPLE IRA Right for Your Small Business?

    Here's how small businesses can benefit from offering a SIMPLE IRA to their employees.
  9. Financial Advisor

    Retirement Planning for the Self-Employed

    How to select a qualified retirement plan if you are self-employed and have no employees.
RELATED FAQS
  1. What are qualified retirement plan types?

    Understand the different types of qualified retirement plans and what they mean in terms of employee and employer contribution ... Read Answer >>
  2. Can catch-up contributions be matched?

    Learn about how the specific terms of your retirement savings plan dictate how and when your employer may match your catch-up ... Read Answer >>
Hot Definitions
  1. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  2. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
  3. Risk Averse

    A description of an investor who, when faced with two investments with a similar expected return (but different risks), will ...
  4. Indirect Tax

    A tax that increases the price of a good so that consumers are actually paying the tax by paying more for the products. An ...
  5. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  6. Beta

    Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. ...
Trading Center