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. Employee Contribution Plan

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

    The rights of an employee who has a qualified pension plan to ...
  3. Withdrawal Credits, Pension Plan

    The rights of an employee who has a qualified pension plan to ...
  4. Matching Contribution

    A type of contribution an employer chooses to make to his or ...
  5. Retirement Contribution

    A monetary contribution to a retirement plan. Retirement contributions ...
  6. Thrift Savings Plan - TSP

    A retirement savings plan created by the Federal Employee's Retirement ...
Related Articles
  1. 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.
  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

    The Basics of a 401(k) Retirement Plan

    This plan has become one of the most popular retirement options. Here's why.
  4. 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.
  5. 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.
  6. 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.
  7. Financial Advisor

    Retirement Planning for the Self-Employed

    How to select a qualified retirement plan if you are self-employed and have no employees.
  8. Retirement

    401(k) Planning: How Much Should You Be Saving?

    We look at how much you should contribute to your 401(k) and when. And also, how much you should have in your account during certain times in your life.
  9. Retirement

    Explaining the 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers.
  10. Retirement

    It’s Never Too Late to Contribute to Your 401(k)

    Find out why it is never the wrong time to start contributing to a 401(k), even in your late 30s, 40s or 50s; discover how to maximize your savings at any age.
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. Are catch-up contributions included in the 415 limit?

    Learn about IRC section 415 limit and why catch-up contributions are not included. Learn about current 401(k) contribution ... Read Answer >>
Hot Definitions
  1. Promissory Note

    A financial instrument that contains a written promise by one party to pay another party a definite sum of money either on ...
  2. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  3. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  4. Absolute Advantage

    The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost ...
  5. Nonce

    Nonce is a number added to a hashed block, that, when rehashed, meets the difficulty level restrictions.
  6. Coupon

    The annual interest rate paid on a bond, expressed as a percentage of the face value. It is also referred to as the "coupon ...
Trading Center