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Tax-Sheltered Annuities

Who Is Eligible?

Employees of religious charitable, educational, scientific and literary organizations described in IRC Sec. 501(c)(3) or public school Systems. Public Law 87-370

Can The Employer Make Contributions?

Yes, but typically the employee agrees to have his or her salary reduced by the amount to be contributed. If the employer contributes its own funds the arrangement is subject to many of the same rules that govern regular qualified plans.

How Much Can Be Contributed?

If past service is ignored generally up to 20% of Compensation can be contributed (not to exceed $10,000). If it is desirable to use past service as a contribution base, then it is often possible to exceed the 20% limit, but the actual contribution may not exceed the lesser of 25% of compensation or $30,000. Forever, the rules are very complex and depend on the actual facts. Other limits may also be imposed.

When Can A TSA Be Set Up?

At any time during the year; however, salary reduction agreements must be entered into before the reduced amounts are available to the employee. An employee can later modify the deferral amount, but only with respect to future income.

1. Annuities (fixed or variable and individual or group)
2. Custodial accounts invested in mutual funds
3. Combination of whole life insurance and annuities

Who Is The Custodian Of The Assets?

Annuities and insurance are with an insurance company. Mutual funds are placed with a corporate trustee.

When Is A Distribution Required?

Generally the funds are withdrawn at retirement. In order to avoid penalties, withdrawals must begin by April 1 of the year following the calendar year during which the taxpayer became 70½ or if later, the calendar year during which the employee actually retires. At a minimum the funds must be taken out over the life expectancy of the taxpayer and. if desired, his or her spouse.

Can TSA Funds Be Borrowed?

Participants can borrow funds from their TSA and later restore them without incurring a tax? If established conditions are met regarding maximum loan amount, amortization requirements time period for repayments, etc.

What Is The Penalty For Early Withdrawals?

There is a 10% penalty for withdrawals prior to age 59½, and all withdrawals are taxed currently as ordinary income unless the distribution is rolled over; transferred to another TSA; or the annuitant is totally disabled, separates from service (after age 55), or dies. Also, the salary reduction amount (but not the earnings) is available for "Financial hardship"; e.g.. an immediate and heavy financial need which cannot be met with other assets.

What Happens At The Death Of A TSA Participant?

The proceeds become a part of the taxable estate for Federal Estate Tax purposes, and they are considered as ordinary income to the beneficiary, except for any "pure" insurance proceeds.

How Does A Participant Change From One TSA To Another?

The transfer of funds from one 403(b) investment to another will not be considered a taxable distribution if the funds remain subject to any distribution restrictions on the prior investment. Revenue Ruling 90-24. If a TSA is rolled directly into an IRA, it will defer taxation. If it is paid to the participant first, it will be subject to the mandatory 20% income tax withholding rule.

Can Deferred Amounts Be Counted As Current Compensation?

Yes, deferred amounts can be counted as current compensation in computing benefits under a separate qualified pension plan if the qualified plan so provides.

End Result

A. The employee avoids current income taxation on the deferred amount (except it is included in the Social Security base).

B. The earnings on the accumulating funds are not taxed until they are distributed.