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Tax Sheltered Annuities or TSA's

Learn More About Tax Sheltered Annuities -403(b) Plans

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TSA/403(b) – For Employees of Public Schools and Certain Tax-Exempt Organizations and certain ministers.

Contact Fiscal Fitness to learn more about your options.

What are the Advantages of Having a TSA/403(b)?

It "forces" you to save, to put money aside for your future retirement use through the convenience of payroll deduction.

The payment of federal and state income taxes is deferred until you withdraw money from your plan. Your tax rate during retirement may be lower than your current tax rate. During your retirement, you may live in a state which does not have an income tax or may have a lower tax rate than the one in which you currently pay taxes.

The investment income (interest, dividends and capital gains) earned in your TSA plan is not taxed until you begin withdrawing during retirement. Thus, the full amount of investment income is being reinvested in the plan — the compounding effect is much greater.

Remember, the income earned will be taxed at the time it is withdrawn, along with the money you contributed.

403(b) Basics & FAQ's:

Individual accounts in a 403(b) plan can be any of the following types.

  • An annuity contract, which is a contract provided through an insurance company.
  • A custodial account, which is an account invested in mutual funds, or
  • A retirement income account set up for church employees. Generally, retirement income accounts can invest in either annuities or mutual funds.

There are three benefits to contributing to a 403(b) plan.

  • The first benefit is that you do not pay tax on allowable contributions in the year they are made. You do not pay tax on allowable contributions until you begin making withdrawals from the plan, usually after you retire. Allowable contributions to a 403(b) plan are either excluded or deducted from your income.
  • The second benefit is that earnings and gains on amounts in your 403(b) account are not taxed until you withdraw them.
  • The third benefit is that you may be eligible to take a credit for elective deferrals contributed to your 403(b) account.

Any eligible employee can participate in a 403(b) plan.

Eligible employees: The following employees are eligible to participate in a 403(b) plan.

  • Employees of tax-exempt organizations established under section 501©(3) of the Internal Revenue Code. These organizations are usually referred to as section 501©(3) organizations or simply 501©(3) organizations.
  • Employees of public school systems who are involved in the day-to-day operations of a school.
  • Employees of cooperative hospital service organizations.
  • Civilian faculty and staff of the Uniformed Services University of the Health Sciences (USUHS).
  • Employees of public school systems organized by Indian tribal governments.
  • Certain ministers.

Ministers: The following ministers are eligible employees for whom a 403(b) account can be established.

  • Ministers employed by section 501©(3) organizations.
  • Self-employed ministers. A self-employed minister is treated as employed by a tax-exempt organization that is a qualified employer.
  • Ministers (chaplains) who meet both of the following requirements.
    • They are employed by organizations that are not section 501©(3) organizations.
    • They function as ministers in their day-to-day professional responsibilities with their employers.

You cannot set up your own 403(b) account. Only employers can set up 403(b) accounts. A self-employed minister cannot set up a 403(b) account for his or her benefit. If you are a self-employed minister, only the organization (denomination) with which you are associated can set up an account for your benefit.

Generally, only your employer can make contributions to your 403(b) account. However, some plans will allow you to make after-tax contributions (defined later).

The following types of contributions can be made to 403(b) accounts.

  1. Elective Deferrals: These are contributions made under a salary reduction agreement. This agreement allows your employer to withhold money from your paycheck to be contributed directly into a 403(b) account for your benefit. You do not pay tax on these contributions until you withdraw them from the account.
  2. Non-elective Contributions: These are employer contributions that are not made under a salary reduction agreement. Non-elective contributions include matching contributions, discretionary contributions, and mandatory contributions from your employer. You do not pay tax on these contributions until you withdraw them from the account.
  3. After-tax Contributions: These are contributions you make with funds that you must include in income on your tax return. A salary payment on which income tax has been withheld is a source of these contributions. If your plan allows you to make after-tax contributions, they are not excluded from income and you cannot deduct them on your tax return.
  4. A Combination of any of the three contribution types listed above.

Self-Employed Minister: If you are a self-employed minister, you are considered both an employee and an employer, and you can contribute to a retirement income account for your own benefit.

There are limits on the amount of contributions that can be made to your 403(b) account each year. If contributions made to your 403(b) account are more than these contribution limits, penalties may apply.

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