July 23


Tax Sheltered Annuities 101: Everything You Need to Know

By Harrison O'Reill

July 23, 2023

Tax-sheltered annuities (TSAs) are a type of retirement savings plan that is available to employees of certain nonprofit organizations, public schools, and colleges.

TSAs are also known as 403(b) plans, named after the section of the Internal Revenue Code that governs them. These plans allow employees to save for retirement on a tax-deferred basis, meaning that contributions are made before taxes are taken out of their paychecks.

With so many retirement plans, it’s only natural that you often get confused about which is which. Worry not; you are in good hands. Finish this article and become even more knowledgeable about your friendly 403(b) plan.

Retirement Plans

Retirement plans are investment vehicles that help individuals save for their retirement. These plans allow individuals to save a portion of their income on a tax-deferred basis. There are several types of retirement plans, including 401(k) plans, 403(b) plans, and Tax Sheltered Annuities (TSAs).

401(k) Plans

401(k) plans are qualified retirement plans that allow employees to save for their retirement through payroll deductions. These plans are offered by employers and allow employees to contribute a portion of their income on a pretax basis.

The contributions are invested in a range of investment options offered by the plan, such as mutual funds and target-date funds.

403(b) Plans

403(b) plans are retirement savings plans for employees of nonprofit organizations, such as schools, universities, and hospitals. These plans are similar to 401(k) plans, but they are subject to different regulations and restrictions. 403(b) plans also offer a range of investment options for plan participants.


Tax-sheltered annuities are retirement savings plans that allow individuals to invest pretax dollars into an annuity contract.

Contributions to a tax-sheltered annuity are made through salary-reduction agreements, which means that the money is taken out of the employee’s paycheck before taxes are deducted.

Contribution Limits

The IRS sets contribution limits for tax-sheltered annuities. As of 2023, the contribution limit is $22,500 per year for individuals under age 50. For individuals aged 50 and older, there is an additional catch-up contribution of $7,500, bringing the total contribution limit to $30,000 per year.

Catch-Up Contributions

Individuals who are within three years of their retirement age and have not contributed the maximum amount to their tax-sheltered annuity in previous years are eligible for catch-up contributions. The catch-up contribution limit is $3,000 per year.

Lifetime Catch-Up

Individuals who have worked for the same employer for at least 15 years and have contributed less than the maximum amount to their tax-sheltered annuity in previous years are eligible for a lifetime catch-up contribution. The lifetime catch-up contribution limit is $15,000.

Employer contributions may also be made to tax-sheltered annuities. Self-employed individuals are also eligible to contribute to tax-sheltered annuities.


Withdrawals from tax-sheltered annuities are subject to strict rules and penalties. It’s important to understand these rules and the potential consequences before taking any withdrawals. If you’re unsure about the best course of action, it may be helpful to consult with a financial advisor or tax professional.


Withdrawal Rules

Withdrawals from tax-sheltered annuities are subject to strict rules. Generally, you can begin taking withdrawals from your annuity without penalty at age 59 1/2.

However, if you retire before age 55, you may be able to take withdrawals without penalty if you meet certain criteria, such as being disabled or taking substantially equal periodic payments.


If you take withdrawals before age 59 1/2, you may be subject to a 10% penalty in addition to ordinary income taxes.

This penalty is designed to discourage early withdrawals and encourage saving for retirement. However, there are some exceptions to this penalty, such as if you become disabled or if you use the funds for certain qualified expenses.

Early Withdrawals

If you need to take an early withdrawal from your tax-sheltered annuity, it’s important to understand the potential consequences.

Not only will you be subject to a penalty, but you may also be required to pay ordinary income taxes on the amount withdrawn. Additionally, if you withdraw from a Roth 403(b) or from after-tax dollars, you may be subject to different rules and tax treatment.


When it comes to tax-sheltered annuities, there are various investment options available. These investments are typically made through insurance companies, which offer a range of investment vehicles to choose from.

Investment Options

One of the primary investment options for tax-sheltered annuities is mutual funds. These funds are professionally managed and can provide a diversified portfolio of stocks, bonds, and other assets. They are often a popular choice for those who want to invest in the stock market without having to pick individual stocks.

Mutual Funds

When investing in mutual funds, it’s important to consider factors such as the fund’s performance history, fees, and investment strategy.

Some mutual funds may focus on specific sectors or industries, while others may be more broadly diversified. It’s important to do your research and choose a fund that aligns with your investment goals and risk tolerance.

Variable Annuities

Another investment option for tax-sheltered annuities is variable annuities. These annuities allow you to invest in a range of underlying funds, similar to mutual funds.

However, they also offer additional benefits such as a death benefit and the option to receive guaranteed income payments.

When investing in variable annuities, it’s important to consider the fees and expenses associated with the annuity, as well as the underlying funds. Some variable annuities may have high fees, which can eat into your returns over time.


Taxation is an important consideration when it comes to retirement planning. Understanding the tax implications of different retirement accounts, such as tax-sheltered annuities, can help individuals make informed decisions about their retirement savings.

Tax-Exempt Organizations

Tax-exempt organizations, such as nonprofits and charities, are not subject to federal income tax. Contributions made to these organizations are tax-deductible for the donor, making them a popular choice for individuals looking to reduce their taxable income.

Tax-Sheltered Annuities

Tax-sheltered annuities, also known as 403(b) plans, are retirement plans available to employees of certain tax-exempt organizations, such as schools and hospitals.


These plans allow employees to make pretax contributions to their retirement accounts, reducing their taxable income in the process. The funds in a tax-sheltered annuity grow tax-free until they are withdrawn.

Pretax Contributions

Pretax contributions are contributions made to a retirement account before taxes are taken out. These contributions are deducted from an employee’s taxable income, reducing the amount of taxes owed. The funds in the retirement account grow tax-free until they are withdrawn, at which point they are subject to ordinary income tax.

Tax-sheltered annuities offer catch-up provisions for employees over the age of 50, allowing them to make additional contributions to their retirement accounts. These catch-up contributions are also tax-deferred, meaning they will not be subject to taxes until they are withdrawn.

Rules and Regulations

Understanding the rules and regulations surrounding tax-sheltered annuities is essential for anyone looking to save for retirement through a 403(b) plan.

By staying up-to-date on the latest rules and regulations from the IRS, as well as the requirements for ERISA and section 501(c)(3) organizations, individuals can ensure that they are making the most of their retirement savings opportunities.

IRS Rules

The Internal Revenue Service (IRS) sets rules and regulations for tax-sheltered annuities, also known as 403(b) plans.

One of the most important rules is that contributions to a 403(b) plan are made on a pretax basis, meaning that they are not subject to federal income tax until the money is withdrawn. This is a significant advantage for those who want to save for retirement and reduce their current tax liability.

Another important rule is that there is a limit to how much an individual can contribute to a 403(b) plan each year. These limits are subject to change each year, so it’s important to stay up-to-date on the latest rules and regulations from the IRS.


The Employee Retirement Income Security Act (ERISA) is a federal law that sets standards for retirement plans, including 403(b) plans.

ERISA requires that employers who offer 403(b) plans to provide certain information to employees, such as details about the plan’s features, investment options, and fees. ERISA also requires that employers act in the best interest of their employees when selecting investment options for the plan.

Section 501(c)(3)

Section 501(c)(3) of the Internal Revenue Code provides tax-exempt status to certain organizations, including many nonprofit organizations.

Many nonprofit organizations, such as schools and hospitals, offer 403(b) plans to their employees. These plans are subject to the same rules and regulations as other 403(b) plans, but there are additional requirements for 501(c)(3) organizations to maintain their tax-exempt status.

In order to qualify for tax-exempt status under section 501(c)(3), an organization must meet certain requirements, such as operating exclusively for charitable, educational, or scientific purposes.

Organizations that offer 403(b) plans must also ensure that the plans are operated in a manner consistent with their tax-exempt status.

Qualified Organization

In order to participate in a 403(b) plan, an individual must be employed by a qualified organization.


This includes public schools, colleges, universities, hospitals, and other nonprofit organizations. It’s important to note that not all nonprofit organizations are qualified organizations, so it’s important to check with your employer to see if you are eligible to participate in a 403(b) plan.


In conclusion, tax-sheltered annuities are a great way to save for retirement while minimizing your tax liability. By deferring taxes on your contributions and earnings until you withdraw the funds, you can maximize your investment returns and potentially pay a lower tax rate in retirement.

It’s important to note that tax-sheltered annuities are not for everyone. They are typically best suited for high-income earners who have already maxed out their other retirement savings options, such as 401(k)s or IRAs.

Additionally, it’s important to carefully consider the fees and expenses associated with these annuities, as they can vary widely and eat into your returns over time.

Overall, tax-sheltered annuities can be a valuable tool in your retirement savings arsenal. However, it’s important to do your research, understand the potential benefits and drawbacks, and consult with a financial advisor before making any investment decisions.

Frequently Asked Questions

Here are some common questions about this topic:

What are tax-sheltered annuities?

Tax-sheltered annuities (TSAs) are retirement savings plans that allow employees of certain organizations to save money for retirement on a tax-deferred basis. These plans are also commonly referred to as 403(b) plans, and they are offered to employees of nonprofit organizations, schools, and certain other tax-exempt organizations.

How do tax-sheltered annuities work?

TSAs work by allowing employees to contribute a portion of their salary to the plan on a pretax basis. The money is invested in a variety of investment options, such as mutual funds and annuities, and grows tax-free until it is withdrawn. When the employee retires, they can begin taking distributions from the plan, which are taxed as ordinary income.

What are the benefits of tax-sheltered annuities?

One of the main benefits of TSAs is the tax-deferred growth they offer. By deferring taxes on the money invested in the plan, employees can potentially save more money for retirement than they would be able to in a taxable account.

Additionally, many TSAs offer a wide range of investment options, allowing employees to choose investments that align with their risk tolerance and investment goals. Finally, some employers may offer matching contributions to the plan, which can further increase the employee’s savings.

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