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An annuity is a contract between an individual and an insurance company. According to the terms of the contract, the annuity owner agrees to pay the insurance company a single payment or a series of payments. In turn, the insurance company agrees to pay the annuity owner an income that begins immediately or at a later date, for a specified time period.
A fixed annuity comes with a minimum interest rate that’s guaranteed by the insurance company. Fixed annuities are popular because they keep the principal secure and offer stable returns.
An indexed annuity is a fixed annuity that offers a rate of return tied to the performance of a stock market index, such as the S&P 500®.
An indexed annuity offers a minimum guaranteed return (typically a 1% to 3% return on 87.5% of the premium). No matter how the stock market index performs, the annuity owner is guaranteed to receive back all of their principal plus the minimum guaranteed return over the life of the contract (assuming no withdrawals are made).
TSA stands for “tax-sheltered annuity.” It is a tax-qualified plan governed by Section 403(b) of the Internal Revenue Code—which is why you might also hear it called a 403(b) plan. These plans are available exclusively to school districts, churches, tax-exempt hospitals and charities.
You may make contributions to a TSA from your regular salary through payroll deduction, or you can roll funds over from another qualified retirement account. You may also transfer funds from one TSA account to another. Throughout the life of your TSA, you can increase, decrease, stop or restart your contributions at any time.
TSAs are a popular investment option for a number of reasons. The premier advantage is that it enables your money to grow and compound year after year—without being reduced by income taxes.
Here are the three key ways you save taxes with a TSA:
1. Income-tax savings. You don’t pay taxes on allowable contributions in the year they’re made. For example, if your earnings are $35,000 and you contribute $4,200 to a TSA, your taxable income for that year is just $30,800. You are not taxed until you begin making withdrawals from your TSA.
Here’s how this income-tax break impacts you over time:
| Annual TSA contribution ($350 per month) |
Federal tax rate |
Annual tax savings |
25-year tax savings |
| $4,200 |
15% |
$630 |
$15,750 |
| $4,200 |
28% |
$1,176 |
$29,400 |
| $4,200 |
35% |
$1,470 |
$36,750 |
This chart demonstrates the taxes saved only during the accumulation phase of the TSA.
2. Tax-deferred growth. The earnings and gains on TSA contributions are not taxed until you withdraw them. For as long as you have the TSA, you earn interest on your contributions and interest on your interest, while deferring taxes until withdrawal.
3. Tax savings at retirement. When you retire and begin to withdraw funds from your TSA, you may be in a lower tax bracket if your total income is smaller—further reducing your tax burden.
Other reasons to choose an annuity are:
- To ensure you receive income payments in retirement.
- To accumulate wealth for your heirs in a safe, secure way.
- To increase your personal savings on a tax-deferred basis.
- To enjoy the security and comfort that come from knowing your principal and interest are protected.
- To avoid probate, which can be lengthy and costly for your heirs.
- To enjoy the benefits of the stock market without the risks.
- To take advantage of an employer-provided match.
TSA contributions are excluded from your gross income, and you generally do not need to report them on your tax returns. Your employer will report your contributions on your W-2 as required by the IRS.
All income taxes are deferred on your TSA contributions until you begin to access the account, typically at retirement. At that time, you pay income taxes on withdrawn amounts.
Your TSA is portable. If your new employer offers a TSA, you may be able to continue to make contributions. If, however, your new employer does not offer a TSA, your money will continue to grow tax-deferred, but you may not make additional contributions. Talk to your new employer about what is offered and how that may affect your current TSA account.
At your death, the account value is paid directly to your designated beneficiary. Unlike many financial savings vehicles, this may help your family avoid the inconvenience of probate on this asset.
Yes, transfers are permitted under current IRS rules. Your agent can help you with that.
Your TSA is intended to help you put away money solely for retirement. And because of the favorable tax benefits of TSAs, the IRS generally (with some exceptions) restricts distribution from your account until you have reached the age of 59 1/2. If you unexpectedly need money before that time, your TSA can help in certain circumstances.
You may access your annuity contract in two ways before retirement:
1. Loans. You can take a tax-free, low-interest loan from your TSA, subject to minimum and maximum amounts and with requirements for repayment.
2. Withdrawals. Withdrawals are generally 100% taxable. If you are under the age of 59 1/2, you must be eligible for a distribution and the IRS may impose a 10% penalty. You also may face a surrender charge as defined by your annuity contract.
- Partial withdrawal: You may be able to withdraw part of your money, typically 10% each year, without incurring a surrender charge.
- Full withdrawal: If you wish to withdraw all of your money, you may incur a surrender charge.
Exceptions exist for certain “early retirement” plans: tax does not apply to distributions from a qualified retirement plan (other than an IRA) after separation from service in or after the year you reached the age of 55, or 50 for qualified public safety employees.
A surrender charge applies to any withdrawals you make above the 10% surrender charge–free amount allowed by your annuity contract. The surrender charge is calculated as a percentage of your account value, and it gradually decreases over a designated period (for example, six years or eight years) until all of your money is available to you without a surrender charge.
The IRS says that you must be at least 59 1/2 years old to receive a TSA payout without incurring a penalty. The exception is if you have a “triggering event,” such as a disability and certain other types of financial hardship.
There are several ways you can receive payments at retirement:
1. Lump-sum payment. This option allows you to withdraw all of your TSA funds at one time.
2. Annuitization of your contract. This option enables you to begin receiving a stream of income for a designated period of time—or for the remainder of your lifetime, subject to the IRS’s required minimum distribution rules.
3. Immediate systematic withdrawal of interest. This option allows you to receive a regular stream of interest income—paid monthly, quarterly, semiannually or annually—without annuitizing your contract. These withdrawals are subject to the IRS’s required minimum distribution rules, which may require you to take more than interest out of your TSA.
4. IRS-required minimum distribution/withdrawals. The IRS stipulates that you begin taking minimum distributions from your TSA once you retire or reach the age of 70 1/2, whichever comes later. If you choose this option, the amount you receive each year is based upon your life expectancy. IRS-required distributions are not subject to surrender charges.
Need help?
A skilled WNIC agent can help you approach the future with confidence. To request a free consultation, call (866) 403-9642, or email us. |
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Annuities are products of the insurance industry, and are not guaranteed by any bank or insured by the FDIC.