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Learn About 403(b) Tax Sheltered Annuities (TSAs)
If you are employed by certain qualified types of employers, you have the opportunity to use a 403(b) tax sheltered annuity as an addition to your retirement savings plan.
A 403(b) is an employer-sponsored plan, so you can’t open a 403(b) account on your own, as you can with an IRA. Only public schools and tax-exempt employers that qualify under an IRS code called 501 (c)(3) are eligible to offer these types of plans. This includes educational organizations such as school districts or higher education institutions, as well as churches, tax-exempt hospitals, and charities.
When it comes to saving for retirement, an employer-sponsored retirement plan offers many advantages:
- Generally, you pay no federal income taxes on the money you put into the plan until it is time to take withdrawals.
- You pay no federal income taxes on any interest or earnings until you take withdrawals.
- Your employer may match a percentage of the amount you contribute to the plan, increasing the value of your account.
- You have the advantage of investing in professionally managed subaccounts available to your particular plan.
- Participating in an employer-sponsored plan is a quick and easier way to save towards retirement.
- Certain 403(b) plans may permit you to make Roth 403(b) contributions on an after-tax basis and, under certain circumstances, the earnings may be distributed free from federal income taxes.
- A qualified distribution of designated Roth contributions is excludable from gross income. A qualified distribution is one that occurs at least 5 years after the year of the participant’s first designated Roth contribution (counting such first year as part of the 5) and is made:
- On or after attainment of age 59½,
- On account of the participant’s disability, or
- On or after the participant’s death.
If the distribution is not a qualified distribution, then the accumulated earnings will be subject to tax, and additional taxes may apply. Designated Roth accounts are subject to the same required minimum distribution rules as other accounts.
A 403(b) TSA is a type of defined contribution plan. They are also referred to as salary-reduction plans. Unlike other types of pension plans that guarantee a certain income at retirement, a defined contribution plan provides you an income based on the value of the account when you retire.
How much can I contribute?
Employees can contribute pre-tax salary (and/or after-tax salary if the plan permits Roth 403(b) contributions) to the plan and the employer may match part, all, or none of that amount. Employees may contribute up to $15,500 in 2008 (adjusted annually for cost of living). If employees have at least 15 years of service with their employer or are at least 50 years, they may be able to contribute more of their income under one or more of the special catch-up provisions.
C08-0221-002 (03/2008)
000902
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