Tax-Deferred Annuity: Retirement Vehicle Under Section 403(b)

A Tax-Deferred Annuity (TDA) is a retirement savings vehicle permitted under Section 403(b) of the U.S. Internal Revenue Code. It is specifically designed for employees of public school systems and certain qualified charitable organizations. Contributions to this annuity are made on a pre-tax basis, and taxes on the earnings are deferred until the annuitant withdraws the funds. This deferral allows the investment to grow tax-free until distribution.

Contribution Limits

As of 2011, the maximum annual contribution to a TDA is $16,500. Additionally, individuals over the age of 50 who are eligible can make catch-up contributions of up to $5,500.

Example:

If an eligible employee aged 52 makes the maximum contribution, they can invest a total of $22,000 ($16,500 + $5,500) in a given year.

Tax Implications

The cash value and dividends of a TDA accrue on a tax-deferred basis. This means that taxes are not paid on the contributions or the earnings until the annuitant begins to receive benefits, usually during retirement. Upon receiving distributions, the annuitant is taxed only on the amount that exceeds their original investment in the annuity.

Example:

If an annuitant contributed $100,000 over their career and the annuity grew to $150,000 by the time of distribution, they would only be taxed on the $50,000 gain.

Eligible Participants

• Employees of public school systems
• Employees of qualified charitable organizations (501(c)(3))

Considerations

• Required Minimum Distributions (RMDs): Similar to other retirement accounts, TDAs require RMDs starting at age 72.
• Portability: TDAs can be rolled over into other retirement accounts like IRAs or new employer’s 403(b) plans.
• Tax Penalties: Early withdrawals (before age 59½) may be subject to ordinary income tax and a 10% penalty.

Roth 403(b)

• Unlike a TDA, contributions to a Roth 403(b) are made with after-tax dollars, but withdrawals during retirement are tax-free.

Traditional IRA

• Similar to TDAs in terms of tax deferral on earnings but available to a broader population beyond public school employees and certain charitable organizations.

401(k) Plan

• A retirement plan similar to a 403(b) but available to employees of for-profit companies.

Catch-Up Contributions

• Additional contribution limits for those aged 50 and above to help boost their retirement savings.

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