TAX SHELTERED ANNUITIES

What is a Tax Sheltered Annuity?

A Tax Sheltered Annuity (TSA) is a tax deferred, long term savings program that permits employees to make contributions on a before-tax basis. It is a tax-favored investment that facilitates your retirement planning. Your tax liability should be reduced.

What are the advantages of a TSA?

1. You choose the amount you want to save.

2. Your contributions are made through payroll reduction.

3. You will not pay federal income tax on your contributions or the interest accrued until you withdraw them.

4. Your take home pay will be greater than if you save on an after-tax basis.

5. Your TSA is completely portable.

The following example shows you the advantages of saving on a pre-tax basis. The example is based on a $2,000 a month gross salary for a participant in the Teacher Retirement System (TRS). The participant claims married with one exemption for federal income tax (FIT). As you can see in example number 2, when $100 is saved on a pre-tax basis the net salary is reduced by only $85. In example 3, you can save more but have no change in your net salary than when you save after-tax.

What difference can tax deferral make?

The illustration below compares after-tax and before-tax accumulated values of $2,500.00 annual deposits earning an 8% hypothetical fixed annual rate of return, excluding charges. It demonstrates how much faster savings grow when tax is deferred until retirement. For ease of comparison, a 28% tax bracket, no withdrawals and no transfers were assumed for both illustrations.

Who is eligible to participate?

As an employee of an educational institution, you are eligible to participate if you are regular, full or part time.

Who owns the TSA contributions?

The employee is the owner of the TSA contributions and has all rights under the certificate, depending on the terms of the plan document.

Can I participate in both a TSA, my retirement plan and an IRA?

Yes, you may participate in the TRS or ORP, a TSA, Deferred Compensation and an IRA.

What effect do contributions have on Social Security taxes?

Your Social Security taxes are calculated prior to reductions made for a TSA. The employer portion of the Social Security tax is not reduced because of your contributions to a TSA.

What do I need to do to enroll in a TSA?

Human Resource Services has available a list of approved carriers. These carriers have agreed to abide by state and federal laws and health science center policies governing TSA's. You should obtain a copy of that list and talk to a few of the approved agents. This will inform you as to the type of investments available. Investment opportunities vary from fixed annuities to mutual funds. You will then enter into a salary reduction agreement with the health science center. This agreement authorizes the institution to reduce your salary and direct the reduction to the company of your choice.

You may terminate contributions and change the amount of your contributions at any time during the year. You may change carriers one time a year.

How much money may I contribute to a TSA?

Generally, your deferral may not exceed the lesser of:

1. 100% of your taxable salary after subtracting retirement contributions but before TSA; or

2. $11,000 for 2002, $12,000 for 2003, $13,000 for 2004, $14,000 for 2005, $15,000 for 2006,

There are some exceptions and Optional Retirement participants have some additional limitations.

Human Resource Services will provide you with a maximum exclusion allowance calculation to help you determine how much of your income you may place into your TSA.

Are withdrawals permitted before retirement?

There is an IRS tax penalty of 10% on withdrawals prior to age 59 1/2 unless due to the participant's:

1. death;

2. disability;

3. attainment of age 55 and separation from service on account of early retirement;

4. separation from service and election of substantially equal periodic payments over your life and joint lives of you and your beneficiary or

5. withdrawals for certain medical expenses which exceed 7.5% of your gross income.

Early withdrawal penalties may be charged by individual carriers.

Are loans available with a TSA?

Yes, you may borrow up to $50,000 or half of the value of the account, whichever is less. The loan must be repaid in five years unless the loan is used to purchase your primary residence.

Note: Be sure to check current IRS rules before making such loans.

What are the distribution options at retirement?

Varying by carrier, the options are:

1. annuity income - on a fixed and/or variable basis;

2. periodic withdrawals;

3. installment payments;

4. lump sum; or

5. distribution regulations vary depending on when the contributions were made and IRS distribution requirements change from time to time and with various events. Your company representative can keep you informed or you may request current IRS publications.

©2000.

For content problems or questions, please contact the HRS Site Manager .
For technical problems, please contact the UNTHSC Webmaster.