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. Qualified Retirement Plan

    A plan that meets requirements of the Internal Revenue Code and ...
  4. Withdrawal Benefits

    The rights of an employee who has a qualified pension plan to ...
  5. 401(k) Plan

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

    The rights of an employee who has a qualified pension plan to ...
Related Articles
  1. Financial Advisor

    What's a Qualified Retirement Plan?

    Employers establish qualified retirement plans to help their employees save money.
  2. Financial Advisor

    The 4-1-1 on 403(b) Plans

    These plans resemble 401(k) plans in many respects, but are specially designed for nonprofit entities.
  3. Retirement

    The Basics Of A 401(k) Retirement Plan

    This plan has become one of the most popular retirement options. Find out why.
  4. Small Business

    Plans The Small-Business Owner Can Establish

    Don't hesitate to adopt a smart plan for you and your employees.
  5. 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.
  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. 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.
  8. 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.
  9. Financial Advisor

    The 401(k) and Qualified Plans Tutorial

    Learn about eligibility requirements, contributions and distribution rules for these retirement plans.
  10. Retirement

    This Is Why Your Employer Should Offer a 401(k)

    Understand the unique benefits that come with a small business offering a retirement savings plan such as a 401(k) to current and future 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. What is the difference between a 401(k) plan and a 457 plan?

    Discover how 401(k) plans are privately offered employee retirement plans, while 457 plans are typically available to public ... Read Answer >>
  3. How can an entrepreneur save for retirement?

    Learn about the retirement savings plan options for entrepreneurs and small business owners, including administration and ... Read Answer >>
  4. What are the 403(b) contribution limits?

    Determine whether 403(b) contributions meet federal guidelines. Contribution limits to this retirement plan are determined ... Read Answer >>
  5. 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 >>
  6. What is the catch-up contribution limit for qualified deferred tax plans?

    Learn about statutory limits established by the U.S. Internal Revenue Service for catch-up contributions to deferred retirement ... Read Answer >>
Hot Definitions
  1. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  2. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  3. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  4. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  5. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  6. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
Trading Center