A Tax-Sheltered Annuity, also known as a TSA, is a 403(b) retirement plan that can be used as a savings alternative to enhance your retirement security.
 

What is a Tax-Sheltered Annuity or TSA?

A Tax-Sheltered Annuity, also known as a TSA, is a 403(b) retirement plan that can be used as a savings alternative to enhance your retirement security. It is an employer sponsored retirement savings program for employees of public educational organizations and nonprofit organizations. The majority of people who participate are teachers, administrators and staff of public schools, colleges, and universities.

Why do I need a TSA or 403(b)?

Because the pension system is not designed to replace all of one’s income at retirement, supplementing your pension is critically important. Inflation also has a huge impact on the spending power of your benefits and its effect is cumulative. While inflation is probably the most important consideration, it’s one that most people fail to plan for. A 403(b) is one of several ways to supplement the state teacher’s retirement system, or CalSTRS.

Also known as a “Qualified” tax-deferred retirement savings plan, a TSA is only available to employees of public education organizations, schools, non-profit employers, and cooperative hospital service organizations. Similar to a 401k plan, employee salary deferrals into a 403(B) plan are made before income tax is paid (known as a tax-deductible contribution) and allowed to grow tax-deferred. The money is then taxed as ordinary income when it is withdrawn from the plan, usually after the employee reaches 59 ½ years old.

What do I need to know about a Tax-Sheltered Annuity?

While this strategy lowers the employee’s tax bill in the years contributions are made, it only delays the tax liability, which then grows over the years along with the savings. Unfortunately, many people forget that there are taxes due later. For that reason, one should carefully consider the exit strategy of a tax-deferred plan BEFORE committing to the strategy. One of the reasons is that ultimately, the tax-liability can be a greater burden in retirement because the two primary deductions (mortgage deduction and dependents) are usually no longer available (the house is hopefully paid off and dependent children are grown). Moreover, even if tax rates don’t change and are the same in retirement as they were in the working years, the withdrawals from a 403b can raise the participant’s annual income placing them in a higher tax bracket, thereby increasing the tax liability. It is crucial to plan accordingly.

Liquidity is another issue to keep in mind as a 403(b) has strict rules for early withdrawals and access is usually limited to a short list of hardship circumstances. Again, planning is of paramount importance so the participant maintains as much liquidity, use and control of their money as possible while they continue to save towards retirement.

Most school districts usually have 15 to 20 Approved Vendors available to their employees and frankly, not all 403(b)’s are created equally. Some perform better than others. Also, some offer guaranteed rates of return while others are susceptible to market losses & volatility. Either way, if you are considering a 403(b) as a retirement supplement, our advisors have experience with most of the Approved Vendors so you can get qualified advice and choose the one that suits you best.

Please Note: Neither Carington, nor any of its agents or representatives give legal, tax, or accounting advice. The information provided here is a summary of our understanding of the current tax laws and regulations as they relate to a 403(b), 401(k), 457 or 529 plans and to the various insurance products mentioned. Laws and regulations regarding these plans may change from time to time. Insurance products are subject to change without notice. Tax rates may go up or down in the future. All prospective purchasers and owners should consult with their own attorneys, accountants, and tax advisors.