What Is a Tax-Sheltered Annuity?


Quick Answer

A tax-sheltered annuity is any annuity that allows an employee to contribute from his own income into a retirement plan. Since the funds are deducted directly from the employee's income, any contributions or benefits are not taxed until the employee withdraws money from the plan. An employer can also contribute to the annuity, giving the employee the additional benefit of added tax-free funds.

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Full Answer

As with any annuity, there are pros and cons to a tax-sheltered annuity. Benefits of a tax-sheltered annuity are flexibility in contributions and optional loans and hardship distributions. Drawbacks to this type of annuity include the possibility of high administrative fees, as well as the fact that the investment options are chosen by the employer. Certain employers may choose to offer a Section 403(b) Plan, which is only open to certain non-profit and public education institutions. This includes public schools, colleges and universities; churches and charitable organizations that are tax-exempt under IRS Section 501(c)(3).

It is possible that some employers may offer Roth accounts designated for 403(b) plans. These plans tax an employee's salary at the time of contribution. However, the funds are tax free at the time of withdrawal, including any income earned from the account.

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