What Is a Tax-Sheltered Annuity (TSA)?

What Is a Tax-Sheltered Annuity (TSA)?

Let me explain what a tax-sheltered annuity, or TSA, really is—it's essentially a 403(b) plan that lets you, as an employee, put pretax money from your income into a retirement account. The IRS doesn't tax these contributions or the earnings until you pull the money out.

Your employer can chip in directly too, which means you're building up more funds without immediate taxes hitting them.

Key Takeaways

You can invest your income before taxes into this retirement plan if you're eligible. These TSA plans are specifically for employees at public schools and tax-exempt organizations. Remember, the IRS taxes the money when you withdraw it, not when you contribute. If your employer contributes, that's extra tax-free growth for you. Charities, religious groups, and other nonprofits can offer these to their staff.

Understanding Tax-Sheltered Annuities (TSAs)

The 403(b) plan is your tax-sheltered way to save for retirement if you work for certain nonprofits or public education spots. There's a cap on how much you can contribute each year, but catch-up rules might let you add more if you didn't max out before.

For 2024, the IRS sets the limit at $23,000, up from $22,500 in 2023—same as 401(k)s. If you're 50 or older, you get an extra $7,500 catch-up for both years.

There's also a lifetime catch-up for folks who've been with a qualified organization for 15+ years and averaged under $5,000 in contributions. Total contributions, including matches, can't exceed 100% of your earnings up to the cap.

You can't start withdrawals before 59½ without penalties—usually 10% from the IRS, unless exempted. Withdrawals count as ordinary income, and you must begin them by age 73 or 75 based on when you were born.

Important Notes on Access

Depending on your plan, you might borrow from it before 59½ as a loan. Most plans allow withdrawals if you become disabled.

Tax-Sheltered Annuities (TSAs) vs. 401(k) Plans

People often stack TSAs up against 401(k)s, and both let you save pretax on a tax-deferred basis. But 401(k)s are for private sector workers at companies that offer them, while TSAs are for tax-exempt org employees and public schools. Nonprofits under IRC Section 501(c)(3) for charity, religion, or education can provide TSAs.

How Does a Tax-Sheltered Annuity Work?

A TSA or 403(b) is a retirement plan from places like churches, nonprofits, and public schools. You contribute part of your salary pretax up to the annual limit. Earnings grow without taxes until you withdraw in retirement.

Can You Take a Loan from a 403(b) Plan?

If your employer permits it, you can take a loan from your 403(b). Not all plans do, so check with your administrator for details on what you can do.

What's the Difference Between a Tax-Sheltered Annuity and a 401(k)?

Both offer tax perks and let you contribute up to $23,000 in 2024 ($22,500 in 2023). TSAs, or 403(b)s, are for church, nonprofit, and public school employees; 401(k)s are for for-profit company workers.

The Bottom Line

Retirement saving is straightforward if your employer offers a plan. If you work at a church, nonprofit, or public school with a 403(b), use it for pretax contributions and possible employer matches to maximize your savings.