Tax-Sheltered Annuity

DEFINITION of 'Tax-Sheltered Annuity'

A type of annuity that allows an employee to make contributions from his or her 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 U.S., one specific tax-sheltered annuity is the Internal Revenue Code's Section 403(b) plan. This plan provides employees of certain non-profit and public education institutions the benefit of having a tax-sheltered method of saving for retirement.

There is usually a maximum amount that an 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 where they did not make the maximum contribution.

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