Contributions to a Tax-Sheltered Annuity
Contributions to a tax-sheltered annuity (TSA), also known as a 403(b) plan, have unique tax treatment. They are made with pre-tax dollars, meaning the money is taken from your salary before income taxes are applied. This reduces your taxable income, lowering your tax bill in the year you make the contributions.
- Pre-Tax Contributions: Money contributed to a TSA is not taxed in the year it is earned. This lowers your current taxable income.
- Tax-Deferred Growth: The money in your TSA grows tax-deferred, meaning you don’t pay taxes on the earnings as long as they remain in the account.
- Taxation Upon Withdrawal: When you eventually withdraw funds from the TSA, typically after retirement, the distributions are taxed as ordinary income.
Suppose your annual salary is $50,000, and you contribute $3,000 to a TSA. Your taxable income for the year will be $47,000, not $50,000. This reduction in taxable income saves you money on taxes for the year you make the contribution.
Tax-Sheltered Annuity Contribution Effects
|Salary Before TSA Contribution
|Taxable Income After Contribution
Contributions to a tax-sheltered annuity are a smart way to reduce your taxable income today while saving for retirement. These contributions grow tax-deferred, offering a significant advantage for long-term savings. Remember, withdrawals are taxed as ordinary income. Understanding these aspects can help you plan your financial future effectively. Contact us today for a free quote.
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Are Tax-Sheltered Annuities only available to certain groups?
Yes, tax-sheltered annuities, also known as 403b plans, are only available to specific groups of people. Specifically, they are designed for employees of public schools and specific tax-exempt organizations. Individuals who work for these entities may contribute a portion of their salary to these annuities, reducing their taxable income and providing a future source of income that can help offset the impact of inflation.
What are my options if I do not work for a tax-exempt organization?
If you do not work for a tax-exempt organization, you can still employ several strategies to counteract inflation risk when purchasing annuities. One common approach is to invest in inflation-indexed annuities. These products provide periodic payments that increase with inflation, helping to preserve the purchasing power of your annuity over time.
When would I owe taxes on my TSA?
You would owe taxes on your Tax-Sheltered Annuity (TSA) or 403b plan when you start withdrawing money from it, typically after retirement. The amount you withdraw becomes part of your taxable income for that year. However, because most people are in a lower tax bracket after retirement, the tax burden might be less than what it would have been during your working years.