Tax-Sheltered Annuity

Before looking at tax-sheltered annuities, it is important to understand first what an annuity is. An annuity is typically a product of insurance companies in which you invest in today (the accumulation phase) to receive money at a later date (the distribution phase). Annuities can be either immediate or deferred.

Types of Annuities

Most immediate annuities are paid in one lump sum and you begin receiving distributions right away. Deferred annuities are more common. In this type of annuity you pay in one lump sum or make scheduled payments so that during the accumulation phase, it can be invested by the insurance company. Distributions on deferred annuities are then paid out years later, typically a set time frame as stated by the annuity contract.

Deferred annuities are tax deferred, which means you will not have to pay income tax until you begin receiving distributions. How much you are taxed will depend upon if you purchased the annuity with pretax dollars (a qualified annuity) or purchased it with dollars that have already been taxed (non-qualified annuity). In the case of non-qualified, you will only pay taxes on any gains above your original amount invested. Qualified means you will need to pay taxes on the original investment as well as any earnings.

What is a Tax-Sheltered Annuity?

The term “tax-sheltered annuity” or “TSA” is generally referred to as a TSA plan or a 403(b) plan. Tax-sheltered annuity plans are retirement plans for various employees of public schools, tax-exempt organizations as well as certain ministers. Tax-sheltered annuities act more like retirement plans, but are still technically annuities because the money invested with these plans is used to buy annuity contracts owned by insurance companies.

The Tax-Sheltered Annuity or 403(b) Plan

TSA or 403(b) plans have a few unique characteristics that set them apart from most annuities. Employees who take advantage of a TSA plan typically set aside a certain percentage of their paycheck each month. Employers are also allowed to match/contribute to these plans as well. This is unique because typically annuities are bought in a lump sum (or at least large payments until the full amount is met).

TSA plans are a deferred annuity which means you still do not have to pay taxes until you begin receiving distributions. However, because TSA plans are purchased with pretax dollars, you need to pay taxes on all of the distributions you receive. Most other annuities tend to be bought with after-tax dollars which require you to only pay income tax on any gains received.

Looking at your Options

As you approach retirement there are many paths you can take to ensure your wealth is protected. If you value diversification in your retirement assets then talk to one of our precious metals specialists about how opening a gold IRA can help protect your retirement. American Bullion specializes in adding precious metals to retirement accounts. Call us today at 1-800-326-9598 to speak with a precious metals specialist.

References: IRS, Suze Orman

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