What is a 403(b) Tax Sheltered Annuity?

A Tax-Sheltered Annuity (TSA), also known as a 403(b) plan is named after a section of the Internal Revenue Code. It is an employer sponsored retirement savings program. Participation is limited by law to employees of public educational organizations and certain nonprofit organizations. The vast majority of participants are teachers in public schools, colleges and universities.

Contributions to a TSA are made for the participating employee by his or her employer. The money that is contributed to the TSA comes either from employer contributions - which are called non-elective deferrals, or from employee contributions, called elective deferrals.

Elective deferrals are deducted from the participant's paycheck and forwarded to the insurance company or mutual fund custodian selected by the participant. The participant signs a salary reduction agreement giving the employer the authority to make the paycheck deduction and remit it to the chosen company. Most TSA contributions are elective deferrals.

You may contribute 100% of your compensation subject to the elective deferral limit of $11,000 for 2002. This limit increases by $1000 per year for each of the next four years so it will be $15,000 in 2006. For individuals age 50+, an additional $1,000 can be contributed for 2002, making the deferral limit $12,000, This amount also increases by $1,000 per year for each of the next four years reaching $5,000 in 2006. If a 403(b) participant has 15 or more years of service, they may be eligible for an additional "catch-up" provision. A "catch-up" provision of $3000 is available only if the participant has not contributed on average more than $5,000 per year into a 403(b) account. An averaging calculation must be done to ensure that the option is available. A lifetime limitation of $15,000 applies to this special "catch-up' provision.

Updated: Monday, December 03, 2007 11:46:42 PM  Eastern