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What is a Tax-Shelterd Annuity (TSA) plan?

A tax-sheltered annuity (TSA) plan is a retirement savings program authorized by section 403(b) of the Internal Revenue Code for employees of educational institutions, churches, and certain non-profit agencies. It allows eligible employees to set aside a portion of their income on a pre-tax basis for retirement.

How does tax-deferred growth benefit me?

If you buy shares of a mutual fund with after-tax dollars, you owe taxes each year on the dividends and capital gains your fund realizes. If you sell one fund and buy another, you owe taxes on the profit. In a tax-deferred investment, you get to keep and invest the tax money you would otherwise owe each year. The extra dollars produce more earnings. You can shift your money among funds without incurring capital gains taxes. Though you must pay taxes when you withdraw your TSA money, your net return will be higher than with a taxable account earning the same return.

Why do I need supplemental retirement income?

Retirement is expensive. Your pension(most people don't even get a pension anymore) and Social Security will provide only part of what you will need. The rest must come from personal savings. On top of that, people are living longer. And instead of working longer most of us would like to retire earlier. Some of us may even be retired longer than we will have worked! That is a fine goal, but we must figure out a way to pay for it. Remember, you need to plan your retirement for your life expectancy. Consider modern medicine and the possibility that you could be retired for 40 years

How does a contribution to a TSA reduce my taxable income?

Your tax-sheltered annuity contribution is not counted in your gross income for tax purposes. Assume an annual gross income of $36,000 in the 25% federal tax bracket. The following chart shows how an annual tax-sheltered annuity contribution of $2,400 saves you $405 in federal taxes and $175 in state taxes while you save $2,400 for retirement (based on single filing status and one exemption).

Looking for a Tax-Sheltered Annuity 403(b) Program investment? Shop first for a company. You will probably stay with the company for a long time - perhaps much longer than you stay with your initial fund choices - so it's important to feel comfortable with its services and range of investment options.

You can invest as little as $20 monthly with some programs.

Though they offer similar products and services, most tax-sheltered annuity companies have distinct styles and strengths. You can learn much more by calling their service representatives, visiting their websites, and reading their materials.

Here are small bios on some of the top annuity insurance companies:

LINCOLN NATIONAL LIFE- The 5th largest company of variable sales in the U.S. In addition to the tax-sheltered annuity sub-accounts managed by Lincoln Financial Group, Lincoln offers variable annuity sub-accounts managed by American Funds, Delaware Investments, Fidelity, Scudder, and other investment advisors.

TIAA-CREF- A group of companies includes one of the world's largest pension systems. TIAA, the Teachers Insurance and Annuity Association, is an insurance company; CREF, the College Retirement Equities Fund, is an investment company. With more than $326 billion in assets under management, TIAA-CREF provides retirement plans for 3.2 million people at more than 15,000 universities, hospitals, and other institutions. TIAA-CREF companies also offer mutual funds, IRAs, fixed and variable personal annuities, insurance, trust services, and tuition savings programs.

Here is a link for current rates of all of the top tax-sheltered annuity companies

How much can I contribute to the TSA Plan?

Some tax-sheltered annuities allow minimum payments as low as $20 a month. The maximum annual contribution limit for 2007 is $15,500. After 2007, the limits will be indexed by the IRS in $500 increments based on the Consumer Price Index. Certain special provisions may allow you to contribute more than this amount. • If you are age 50 or older you can contribute a "catch-up" amount - an additional $5,000 in 2007 over and above the standard maximum, no matter how much you've contributed in the past.I contribute to an IRA.

Does that affect my TSA contribution?

No, you can contribute the full amount to both programs. The contribution limit for a traditional or Roth IRA in 2006 is $4,000 plus an additional $1,000 if you are age 50 or over.

What can I invest in my TSA account?

There are many companies in the TSA 403(b) Program offering over thousands of investment options for your tax-sheltered annuity dollars. You select a company (or more than one) from among those authorized under the Program and then choose from among the mutual funds the company offers. Options range from conservative to aggressive and include mutual funds that offer stock, bond, and money market investments, insurance companies that offer annuities with variable and fixed rates of returns.

There are so many choices! How do I pick an investment?

Like most activities, it takes practice to feel knowledgeable about investing in a tax-sheltered annuity. You aren't expected to pick the top-performing investment on your first try, but you should be able to find a few that are likely to meet your goals. Here are some ways to get started: • Decide on a tax-sheltered annuity company first. It's easy to change funds quickly within a company, but it takes time to move your money to a different company. All tax-sheltered annuity companies have web sites with extensive information on their funds as well as toll-free numbers you can call for information.

Are my TSA investments guaranteed?

Usually no. If you choose a fixed annuity, the insurance company guarantees your principal and a minimum rate of return. But if you choose a variable annuity or a mutual fund, the value of your investment will fluctuate with the market. You could lose money.

What fees and expenses are charged for participation in a tax-sheltered annuity program?

Investment Company fees. These fees depend on the company and the type of investment you select. Some tax-sheltered annuity investment companies have no direct fees.

• Annual fees. Each tax-sheltered annuity company is permitted to charge an annual fee of up to $30 per participant. Most insurance companies have waived this fee.

• Insurance company charges. If you purchase a tax-sheltered annuity from an insurance company, you may pay a surrender charge of up to 8% if you withdraw your funds during the first eight years of the contract, or transfer them to a different company. You may also pay a mortality and expense (M&E) charge on variable annuity accounts. Most of this charge is agent compensation. Generally, you will pay about a 1% fee for this.

• Redemption fees. Certain specialized funds charge a redemption fee for withdrawal or transfer before a specified period (90 to 365 days or more) has elapsed.

When can I take money out of my TSA account?

The TSA plan is a long-term savings vehicle to be used for retirement. IRS regulations limit the access you have to your savings. You may withdraw your contributions only: • when you leave employer, reach age 59 ½, or become disabled; or • in cases of substantial financial hardship. Withdrawals before age 59 ½ may result in tax penalties.

What is a financial hardship?

The IRS Code specifies that distributions due to financial hardship are allowed only when there is an immediate and heavy financial need and the distribution is necessary to satisfy the financial need. The IRS has identified four situations that meet the criteria of an immediate and heavy financial need: • Uninsured medical expenses • Purchase of a primary residence • College tuition • To prevent eviction from or foreclosure on the individual's primary residence.

You must first exhaust all other means to meet the financial needs listed above, including taking a loan from your tax-sheltered annuity account.

Do I have to take distributions from my tax-sheltered annuity at any certain time?

In most cases, you must begin receiving income from your tax-sheltered annuity by April 1 of the year after you turn 70 ½. If you neglect to take the distribution, you will incur a 50% penalty on the minimum amount you should have received. Your investment company will calculate your minimum required distribution upon request.

What happens to my tax-sheltered annuity if I die?

The investment company account application includes a Beneficiary Designation section that should be filed with your investment company. You can change the designation by notifying the company in writing. If you do not file a beneficiary designation, the investment company will determine your beneficiary in accord with your individual contract or custodial agreement.

Where can I find the current rates on annuities?

Try this service to obtain a free prospectus from each major annuity company. This will give you time to look over the individual companies to find the best fit for your needs.