Tax sheltered annuities are retirement savings programs and vehicles that the Internal Revenue Service allows for under the 403(b) section of their tax code. They were created for the benefit of employees who work for churches, educational institutions, and specific not for profit agencies.
They offer the advantage of permitting employees who are eligible to participate to contribute nearly all of their annual income towards retirement savings and investments in the plan. As an example of the generous limits with these particular plans, employers who choose to contribute can put in as much as $53,000 as of 2016 for any single tax year.
This supplemental program for retirement savings gives participating individuals a variety of ways in which they can choose to contribute funds. They may invest on an after tax basis, as with a Roth plan. They may also choose to contribute using funds that are pre-taxed. They can also opt to use a combination of the two methods. These plans and their participating contributions are entirely voluntary. Employees generally make the majority of these contributions as there is not always an employer match involved with them.
A variety of employees of eligible organizations may participate in these tax sheltered annuity plans. Employees of public schools, universities, and state colleges are allowed to participate. Many employees of churches are also allowed to become involved. Those who work for the school systems run by Indian tribes and their governments may participate. Not for profit 501(c)(3) churches’ and organizations’ ministers are included in them, as are ministers who are self employed who serve as part of a tax exempt organization. Chaplains are also usually qualified to participate.
There are several good reasons to become involved with these tax sheltered annuity plans. With automatic payroll deductions, it is a simple and relatively painless means of building up extra savings which individuals will require to increase their after retirement income.
They can get involved in a low cost program that is flexible enough to offer a good selection of investment choices. People can make contributions on a Roth after tax basis, a pre tax basis, or a combination of the two. Finally these plans are portable, meaning the owners can take their retirement vehicles with them when they move to a different job or another not for profit organization.
Thanks to these plans and vehicles, account holders are able to invest tax money that would otherwise go to the IRS. They can move money between the various funds in the plans without suffering from capital gains taxes or additional fees. This gives these TSA pre tax accounts a greater return than a taxable account would enjoy if it earned similar returns. For any individuals who use these account vehicles as Roth after tax accounts, all qualified distributions at retirement will be enjoyed completely tax free.
Money from these accounts can not be taken out without penalties until the individual reaches the government mandated minimum retirement age of 59 ½. They must begin taking distributions by the time they turn 70. An exception to the minimum retirement age is for individuals who stop working for their not for profit company before they reach retirement age. In this case, they are allowed to go ahead and begin receiving distributions without having to pay the extra 10% early withdrawal penalty tax. Only any taxes that were due for monies which had been contributed as pre tax dollars would apply in this particular case.