What is a Tax Sheltered Annuity (TSA) and 403(b)?

Shawn Plummer

CEO, The Annuity Expert

A Tax Sheltered Annuity (TSA) is a pension plan for employees of nonprofit organizations as specified by the IRS, in accordance with section 501(c)(3) and 403(b) of the Internal Revenue Code.

What Is A Tax-Sheltered Annuity?

What is a TSA Plan? A Tax Sheltered Annuity (TSA) is a pension plan for employees of nonprofit organizations as specified by the IRS under sections 501(c)(3) and 403(b) of the Internal Revenue Code.

The tax deferment allowed is like allowing for contributions a corporate employer makes to a qualified pension or profit-sharing plan.

TSA plan participants include:

This guide will answer the following questions:

  • What is a tax-sheltered annuity?
  • How does a tax-sheltered annuity work?
  • Can I withdraw money from my TSA?
  • Are a tax-sheltered annuity qualified funds?
  • Is a TSA pre-tax money?

What Are Tax-Sheltered Annuity Plans

Nonprofits and public education institutions can establish tax-sheltered annuity plans, often known as 403(b) plans. They enable participants to invest pre-tax funds in an annuity or custodial account.

These pensions’ benefits are comparable to those provided by 401(k) plans offered by businesses organized for profit. Employees of qualifying employers may participate in these TSA plans, which allow them to defer income under a salary reduction agreement.

Although participants may defer additional amounts in a TSA, the maximum salary that can be reduced is limited to the elective deferral amount—and this deferred money is invested in the TSA.

Employer contributions, both matching and non-matching, may be made at a certain percentage of the plan participant’s deferrals or without regard to employee deferrals.

Employee and employer contributions combined may not exceed the yearly defined contribution limits.

A 403(b) tax-sheltered annuity plan, like a 401(k), may allow participants to allocate some or all of their plan contributions on an after-tax basis to a designated Roth account.

What Is A 403(b) Plan?

A tax-advantaged, defined contribution retirement savings plan, sometimes called a tax-sheltered annuity, is available for public education organizations, institutions of higher education, some not-for-profit employers (only 501(c)(3) organizations), cooperative hospital service organizations, and self-employed ministers in the United States.

  • Employee contributions, which are payroll deducted into a TSA 403(b) tax plan, are generally made on a pre-tax basis and are allowed to grow tax-deferred.
  • Withdrawals from the plan are taxed as ordinary income.
  • TSA 403(b) plans are funded with annuity contracts and/or a mutual fund platform
  • Roth contributions may be allowed and are taxable, subject to certain requirements.
  • Earnings on Roth contributions that meet certain requirements are not subject to federal income tax.
  • Some plans provide employer match and/or non-match contributions on behalf of plan participants. 
  • FICA taxes are currently withheld from salary reduction contributions to the 403(b) TSA retirement plan.

403(b) Annuity Payroll Deductions

  • Employee authorizes the employer to reduce his/her salary by a specified amount to contribute to a 403(b)
  • Employer forwards this amount to an insurance company to fund a 403(b) on behalf of the employee

No federal income taxes are currently withheld on the portion of salary contributed to the 403(b). 

It is excluded from the employee’s gross income for federal and most state income tax purposes (except in designated Roth contributions).

FICA taxes are currently withheld from the portion of salary contributed to the 403(b).

Each employee who wishes to participate in a 403(b) generally must submit a “salary reduction agreement (SRA)” (a.k.a. “amendment to employment contract”) to the employer specifying the amount by which the employee’s salary is to be reduced.

Some 403(b) plans have automatic enrollment features that automatically begin salary reduction contributions when employees become eligible to participate unless the participant affirmatively opts out.

These automatic enrollment plans are also known as “negative election” plans.

The tax code limits the amount each employee can contribute to a 403(b) plan.

This amount depends on many factors and should be determined annually for each employee using a formula that complies with applicable tax requirements. 

Tax Sheltered Annuity In Retirement

A 403(b) TSA annuity contract may be annuitized at any time after becoming eligible for distribution.

There are 2 periods to an annuity: the accumulation period and the distribution period (annuitization or income rider).

TSA Withdrawal Rules

You may withdraw funds from your TSA before retirement only in the following circumstances (triggering events):

  • termination of employment;
  • financial hardship due to medical bills or college expenses;
  • disability; and
  • death.
  • qualified domestic relations order (QDRO) due to a divorce
  • Return of excess elective deferrals

Withdrawals may be subject to surrender charges in the contract.

Withdrawals from a 403(b) TSA made before age 59½ will generally result in an IRS 10% early-withdrawal penalty in addition to income taxes.

There is no IRS penalty on withdrawals after age 55 if you terminate employment or after age 59½ for any reason.

403(b) Calculator

Annuities are the only retirement plan in the United States that guarantees an income for the rest of your life, even after the account has run out of money. You can roll over your 403(b) into an IRA annuity without a tax penalty. Use our 403(b) calculator to determine how much retirement income an annuity can provide. Then request a quote below.

Loan Provisions

You may be eligible to receive one loan per calendar year from your TSA retirement plan.

Each loan must be at least $1,000, and the amount you may borrow may be reduced if you already have an outstanding loan balance or have taken another loan within the prior 12 months.

Required Minimum Distributions

You may receive IRS Required Minimum Distributions without a surrender charge.

90-24 Transfer

Transfer of funds from one 403(b)/tax-sheltered annuity (TSA) contract to another (403(b) /TSA contract.

If you are in transition between employers, any retirement-savings funds your employer distributes directly to you are subject to 20% federal tax withholding, leaving considerably less money for you to transfer into another qualified plan.

Exceptions to the 20% federal tax withholding:

  • Direct Rollovers: Funds transfer directly from one financial institution to another.
  • Free Looks: When a newly issued contract is canceled.
  • Hardship: An IRS-qualified financial hardship
  • Substantially Equal Periodic Payments: 72(t) and 72(q) distributions before age 59.5
  • Divorce Case Direct Transfer: Funds that are distributed due to a divorce case.
  • Excess Contribution Transfer: Funds are removed because you contributed more than allowed.
  • Required Minimum Distribution (RMD): Funds are required to be distributed at 72.

If you don’t transfer an amount equal to your direct distribution within 60 days, the amount not transferred is subject to income taxes and an IRS penalty.

An ideal way to avoid this blow to your savings is to transfer that money directly into a TSA.

You can avoid taxes and penalties and allow your money to grow in a safe, tax-deferred annuity.

403(b) Tax Advantages

Lower Taxable Income

Contributions are made on a pre-tax basis, which lowers your current taxable income.

Compound Savings

Income taxes on your TSA savings are due only when you withdraw or begin taking regular distributions, generally at retirement, when your tax bracket may be lower. As a result, interest accumulates on your principal, your earnings, and the money you would otherwise pay in income taxes.

How Are Contributions To A Tax-Sheltered Annuited Treated With Regards To Taxation?

Tax-sheltered annuities (TSA) are considered to be a qualified retirement plan. Contributions to a TSA are taken from your earnings and set aside in the retirement plan to grow. They do not become taxed until you take them out of the account in retirement. Withdrawals from a TSA will be taxed as ordinary income tax. Withdrawals will also be subject to a 10% penalty from the IRS if withdrawn before age 59 1/2.

What Do My Beneficiaries Receive When I Die?

Tax-sheltered annuities come with a straightforward death benefit which is the annuity’s accumulation value in a lump sum.

Helpful tip: If you want to leave money to your beneficiaries, life insurance might be a better option for you. In some cases, you don’t need to take a medical examination. Shop online life insurance quotes and find out if you can get affordable coverage. Coverage starts at $9.37 per month. Proceeds are tax-free too!

When can I take the money out?

You can take distributions from the 403(b) plan at age 59½ if you are fully disabled or at a separation of service.

  • 10% IRS penalty may apply if withdrawn before age 59½.
  • Regular income tax will be due on distributions.

Distributions due to financial hardship may be available.

Please check with the Plan Administrator for eligible hardship distributions and provide any supporting documentation of the hardship.

All distributions must be approved by the plan administrator unless grandfathered.

Grandfathered exceptions include:

  • You did not make any salary deferral contributions to the specific contract after December 31, 2004.
  • Your contract was issued with a 90-24 transfer initiated before September 25, 2007, and no additional contributions were made.
  • Your employer that sponsored the contract no longer exists.

Annuity vs. 403(b): Reasons to Rollover to an Annuity

A solid TSA 403(b) retirement strategy could be rolling the retirement plan into a new and possibly better annuity. Benefits include:


There are no TSA tax consequences as long as you follow IRS guidelines. You won’t pay any taxes on gains from the annuity until you withdraw your money.

Growth Potential

You can earn additional interest based on an external market index’s upward movement in both bull and bear markets.

Protection from market downturns

You will not lose money in a fixed index annuity due to market downturns. If the markets have a down year, you earn zero interest.

In exchange for this protection, you are limited on the upside you can get each year.

Guaranteed retirement income for life

You can choose to annuitize your annuity or add an optional income rider to generate a paycheck you can never outlive. Sometimes you can even get a paycheck that increases to help with inflation and the cost of living.


In addition to an income for life, waivers of surrender charges are often included to offer accessibility to your retirement plan in case of emergencies like entering a nursing home or terminal illness. In addition, there are no limits on annual contributions to an annuity.

Estate Planning

With most fixed indexed annuities, your beneficiaries are guaranteed to receive your annuity’s Accumulation Value or Minimum Guaranteed Value, whichever is greater.

Contribution Match

As a 403(b) match from your employer, some annuities can offer a premium bonus (up to 20%) on rollovers and additional deposits.

How To Spend a 403(b) TSA Efficiently in Retirement

Utilizing a deferred annuity with a lifetime income rider will distribute a monthly income paycheck from the tax-sheltered annuity over a lifetime, even if the TSA 403(b) runs out of money. Certain annuities will also provide an income that increases yearly to maintain a retiree’s lifestyle as inflation and living costs rise.

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Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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