Tax-sheltered annuities are a sort of retirement plans only open to people employed by cultural, non-profit, religious and educational organizations. This annuity allows the member to make voluntary deductions from the monthly salary into a withdrawal plan.The deductions come from the salary of the staff and are free of tax until the money is withdrawal as part of the retirement plan.This means that the member does not pay any tax of the contribution nor interest earned until the withdrawal phase of the plan. It is for this reason that this form of annuity is called tax-sheltered annuity or 403(b) as it is known in the tax code.
How do tax-sheltered annuities work?
As said, with this retirement plan the taxes on income from investments of the retirement plan are not taxable until those who have contributed to the initial amount decide to take out their profits. Therefore, the investments can grow at a much faster rate than normal savings accounts as the tax-deferred interest do accumulate over time, giving the investors more money during retirement. The total income at the end of the day would not only consist of the earnings and interest earned but the principle investments as well which is capital protected under this plan.
In recent years, the rules on tax free annuities have relaxed and are no longer restricted to those employed in the industries above. Nowadays, this plan is offered to most employed personnel allowing more people to benefit for the tax free status of their retirement plans. Many organizations have started to offer tax deferred annuities as options to their employees in order to secure a better future for them.
Contribution limits of tax-sheltered annuities
Unlike other annuities, there is a cap to the maximum amount contributed annually to the retirement plan. For an individual, the maximum amount one can contribute per year is $14,000 while employers may make a joint contribution to their employees fund up to the combined total of $44,000. If the employee is above 50 years old, he or she may contribute another $5000 more above the ceiling while if the employee has been with same employer for more than fifteen years, the ceiling is raised by another $3,000.
Penalties on early withdrawal
As with other annuity plans, tax-sheltered annuities were created to assist employees in their retirement days. Therefore any withdrawal before retirement age will incur a penalty levied by the Internal Revenue Service. At the moment, the penalty is ten percent of the amount withdrawn. Also, any withdrawal before retirement age will be subjected to the normal income tax brackets.