Tax-Sheltered Annuity (TSA), also known as a 403(b), is an alternative
retirement savings plan. Not everyone can participate in this plan, and
it is restricted to those who are employed by educational, cultural, or
non-profit organizations such as religious groups (also known as 501
(c)(3) organizations).
TAX-SHELTERED ANNUITY BENEFITS
Contributions to a Tax-Sheltered Annuity are done through a payroll
deduction and are therefore taken out pre-tax. This feature of a
Tax-Sheltered Annuity is very beneficial since your contributions are
not seen as income and you may pay less federal tax at the end of the
year. A Tax-Sheltered Annuity is also tax deferred during the
accumulation phase. This means you will not pay any taxes on the amount
you contribute or the interest earned until you begin the withdrawal
phase.
If your plan allows, you may elect to contribute post-tax money to your
Tax-Sheltered Annuity by using your paycheck. Any money you contribute
post-tax must be declared on your income tax return and is not subject
to the tax-deferred exemption. When selecting a Tax-Sheltered Annuity
you may choose between fixed and variable, or a combination of the two.
It is possible to take loans from your Tax-Sheltered Annuity, but these
loans are limited to the lesser of $50,000 or fifty percent of your
vested amount. Another feature of a Tax-Sheltered Annuity is the
ability to rollover funds into other investment options. For example,
it is possible to use your 403(b) to fund your 401(k), Individual
Retirement Account (IRA), or another 403(b).
It is important to check any contribution limits or rules established
by the new plan administrator before committing to a rollover. If you
die before receiving payments, your beneficiaries are entitled to
similar options using your Tax-Sheltered Annuity. A spouse is entitled
to all of the aforementioned options, while a non-spouse is prohibited
from using your annuity money to fund an IRA. A non-spouse beneficiary
is only able to transfer funds from one 403(b) to another.
CONTRIBUTION LIMITS OF A TAX-SHELTERED ANNUITY
Unlike a regular deferred annuity, there are maximum contribution
limits determined by the Internal Revenue Service (IRS) for each year.
Beginning in 2006 the maximum personal (elective) contribution limit
was increased to $15,000 per year, up from $14,000 in 2005. Also in
2006, your employer (non-elective) may choose to contribute to your
Tax-Sheltered Annuity with a combined maximum contribution limit of $
44,000.
You may be able to contribute up to $5000 more per year if you are age
50 or older and an additional $3000 per year if you have been with the
same company for more than fifteen years. Failure to comply with these
contribution limits can result in additional taxes and penalties for
both the employee and contributing employer.
TAX PENALTIES OF TAX-SHELTERED ANNUITY AND AGE REGULATIONS
As with the deferred annuity, a Tax-Sheltered Annuity is used to
supplement retirement income. If you decide to withdraw money prior to
age 59 ½ you will be subject to a ten percent penalty by the IRS in
addition to the standard income tax. There are a few exceptions to
paying this penalty, although specific criteria must be met.
If you leave the service, encounter extreme and immediate financial
hardship, or become disabled you can avoid paying the ten percent
penalty. Although the ten percent penalty is not enforced in these
cases, you are still responsible for paying income tax on the money you
withdraw. You must begin taking minimum payments from your
Tax-Sheltered Annuity in either the same year as your retire or by age
70 ½, whichever comes first.
Failure to do so will result in a fifty percent excise tax on the money
you should be receiving. The only exception to this age restriction
pertains to all contributions made to a Tax-Sheltered Annuity prior to
January 1, 1987. Anyone who paid into a Tax-Sheltered Annuity before
this date is allowed to defer withdrawal until age 75. If you die
before the withdrawal period your beneficiaries may receive payouts
from your Tax-Sheltered Annuity without paying the ten percent penalty,
but they are still responsible for the income taxes.
Regulations on tax compliance change every few years to accommodate
inflation rates, and it is important to familiarize yourself with these
changes to avoid penalties from the IRS. Helpful resources including
articles, worksheets, and an updated FAQ page can be located at
www.irs.gov and search for keywords "tax sheltered annuity."
Rocco and his team of bonded professional attorneys, CPAs and
accountants help affluent individuals and companies retain control of
their domestic and foreign/offshore assets, protect their assets, build
& preserve their wealth and financially structure their money to
reduce capital gains taxes, estate taxes, inheritance taxes, avoid the
probate process and decrease income taxes.
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Rocco Beatrice, CPA, MST, MBA, Award-winning trust & estate-planning expert
71 Commercial Street #150 Boston, MA 02109 tel: 508.429.0011 fax: 508.429.3034
Click here for more info: http://www.UltraTrust.com, http://ultratrust.com/living-will.html
Disclaimer: All information on this site is provided for informational purposes only! By no means is any
information presented herein intended to substitute for the advice provided to you by any health care or other professional
or organization.
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