26. Tax Sheltered Annuity

An employee of a public school system or a tax exempt organization of the type described in Section 501 (c) (3) of the Code may participate in a tax sheltered annuity (T.S.A.) program.

The advantage of a T.S.A. is that your annual deposit is deductible from your income tax. A second benefit a T.S.A. offers is the accumulation of compounded interest free from income taxation.

You may elect to defer a portion of your current income up to a limit (your "exclusion" allowance) or apply a salary increase to your T.S.A. Your employer will make the deduction from your salary. Your exact exclusion allowance may be calculated. As a general rule of thumb, you may contribute up to 16% of your salary.

You may select from various investment contracts. Your rate of return will fluctuate with the prevailing market rates. The funds may be invested in a fixed or a variable income account. You may choose between either fund. In many cases, the company will guarantee an interest rate for a period of time.

You are taxed at ordinary income rates on any portion of your funds you withdraw. Usually one receives benefit payments in installments or as an annuity at retirement. Normally your tax bracket is lower at retirement, and your need for investment income is greater. Annuity options can guarantee income for the remainder of your life (and the life of your spouse, if you wish) and include further guarantees for a beneficiary. You may custom design your withdrawals to meet your income and tax needs.

Individuals, employed by an organization other than a public school, may designate their beneficiary and payout option in order to exclude the value of their T.S.A. from estate taxation.

Tax reference verification 1-800-829-1040

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