403(b) Tax Sheltered Account Quick Answers

This information is provided as a generic, non-biased guide to 403(b) TSA accounts. The information below is for educational purposes only. The laws and regulations pertaining to this information may change periodically.

We recommend seeking qualified advice from a tax advisor, TSA representative or your local administration, prior to participating in a TSA program.

What is a 403(b) TSA?

A Tax-Sheltered Account (TSA), also known as a Tax-Deferred Account (TDA) or 403(b) Plan, is a unique retirement savings plan available to educational employees and employees of certain non-profit organizations. A plan participant may elect to contribute as much as $15,500 or more (in certain cases) to a Tax-Deferred Account available under the plan. The contribution reduces current taxable income and the earnings in the plan are tax-deferred. In other words, you pay no income tax on the contributions or earnings until withdrawn. Withdrawals are taxed as ordinary income when made and if made before age 59 1/2 are subject to an additional 10% federal income tax penalty.

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How does a 403(b) TSA work?

A TSA plan may be established with certain insurance companies (403(b)) or mutual funds (403(b)(7)) referred to as a Service Provider approved by your School District. An individual determines the contribution amount (within IRS limits) and instructs the District (within IRS limits) to reduce his/her income by that amount. The District then sends the contributions to the plan established by the employee and a TSA representative. The contributions and earnings are not subject to current income tax and accumulate tax-deferred until withdrawn. Withdrawals are taxed as ordinary income when made and if made before age 59 1/2 are subject to an additional 10% federal income tax penalty.

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Who is eligible to contribute to a TSA?

All eligible employees of the District may participate in the TSA program. Excluded employees are those who:

1. Will not contribute more than $200 annually.
2. Employees who are nonresident aliens.
3. Students performing certain services.
4. Employees who “normally work less than 20 hours each week.”

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What does “Tax-Deferred” mean?

Tax-deferred means that you postpone paying taxes on the amount you contribute to a TSA and the earnings on your investment, until you decide to start taking money out of the plan.  At that time, withdrawals from the plan will be subject to taxes as ordinary income and if made before age 59 1/2 are subject to an additional 10% federal income tax penalty.  Your advantage is that throughout the accumulation period, your money grows free from taxes.  This allows your contributions to compound to an amount greater than if your contributions and earnings were taxed each year.

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Can you give me an example of a tax-deferred savings plan vs. a conventional (bank) savings plan?

If your goal is to save $2,535 per year and your tax rate is 27%, you will need to earn $3,472 per year in order to save $2,535 in a conventional savings plan ($3,472 – 27% for taxes = $2,535).  A tax-deferred account is a pre-tax investment; therefore, you may save the entire $3,472 ($3,472 – 0 for taxes = $3,472).

Conventional Savings Plan		Tax-Deferred Savings Plan
$3,472	Amount Earned	$3,472
27%	Tax Rate	27%
$937	Tax Paid	0
$2,535	Net Annual Amount to Save	$3,472
7% (5.11% after-tax)	Earnings Rate*	7%
25	Years of Saving	25
$122,839	Value at End of 25 Years	$219,600

*This is a hypothetical illustration and is not indicative of any particular investment.

Bank accounts are insured by the Federal Deposit Insurance Corporation. Guarantee of an insurance product are based on the claim paying ability of the issuing company. Investments in securities are subject to risks including possible loss of principal.

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What types of 403(b) TSA plans are available?

NOTE: THE INFORMATION PROVIDED IS OF GENERAL NATURE AND THE SELECTION OF A 403(B) TSA PROGRAM SHOULD BE CAREFULLY THOUGHT OUT. ADVICE SHOULD BE SOUGHT FROM YOUR TAX ADVISOR AS WELL AS OTHER INVESTMENT/TSA PROFESSIONALS.

Fixed Annuities – A fixed account plan is an insurance contract to which regular contributions or in some cases lump sum contributions are made.  An insurance company credits a designated rate of interest that is determined by the company.  The account “usually” guarantees a minimum rate of interest.  A fixed account plan may only be offered by an insurance company and is typically the most conservative means of investing.  However, any guarantee is based solely on the claims paying ability of the issuing insurance company.

Mutual Funds – A mutual fund used as a 403(b) TSA plan allows you to select where your money will be invested. For example, Investments the fund makes may be in stocks, bonds, money markets, international securities, or other sector markets.

The general objective of a mutual fund is the increase the value of your deposits over time, through capital appreciation and dividend reinvestment, rather than interest accumulation. Mutual funds are not guaranteed as to principal and earnings, and not all mutual fund companies make a 403(b) TSA plan available for investors.

Mutual funds typically are a front-end load (sales charges are applied to deposits), a back-end load (sales charges are applied to withdrawals), a level-load (sales charges are deducted annually) or a no-load (no sales charges apply).

Variable Annuities – A variable account plan may offer both the advantages of a fixed account and mutual funds. A variable account generally will allow you to direct your investment between a fixed account (i.e. interest rates are determined by the Board of Directors of the company and credited to the account) and a sub account.

Variable annuities offer an opportunity to diversify investments, and the option (in many cases) to deposit into both a fixed account and sub account investment options simultaneously.

NOTE: IT IS IMPORTANT TO UNDERSTAND THAT A MUTUAL FUND OR VAIRABLE ANNUITY 403(b) TSA PLAN IS NOT GUARANTEED. CAREFULLY CONSIDER THE INVESTMENT OBJECTIVES, RISKS, CHARGES AND EXPENSES OF A FUND OR SUB-ACCOUNT BEFORE INVESTING. THIS AND OTHER INFORMATION IS CONTAINED IN THE PROSPECTUS AVAILABLE FROM YOUR REPRESENTATIVE. READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.  INVESTMENTS ARE SUBJECT TO MARKET RISK AND POTENTIAL LOSS OF PRINCIPAL.

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What forms are required to start a 403(b) TSA plan?

An employee of a School District who chooses to start contributing to a 403(b) TSA plan does so by completing a Salary Reduction Agreement, and if their contribution for any calendar year will exceed $15,500, the participant must also submit a Modified Maximum Amount Contributable worksheet. 

The forms must be submitted to the payroll office within a specified time frame of the month in which the reduction is to start.  Only the Salary Reduction Agreement for your School District is acceptable. 

Your Service Provider, Agent, Registered Representative or Investment Advisor Representative should provide the Modified Maximum Amount Contributable worksheet.  The district will not provide this form.  You must sign the Salary Reduction Agreement and Modified Maximum Amount Contributable worksheets.

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May I make changes to my 403(b) TSA plan?

Federal Tax Law allows you to make changes to your 403(b) TSA contribution as needed during the year.  A Salary Reduction Agreement is required and if contributions for a calendar year exceed $15,500, a Modified Maximum Amount Contributable worksheet is also required for every change.

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How do I make a change to my 403(b) TSA plan?

All changes are made by submitting a new Salary Reduction Agreement.  If contributions for a calendar year exceed $15,500, a Modified Maximum Amount Contributable worksheet is also required.  The new Salary Reduction Agreement and Modified Maximum Amount Contributable worksheet will supersede any previous agreements.  Salary Reduction Agreements must be in the payroll office before a specified time of the month to which the change is to be effective.

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May I stop my 403(b) TSA contribution?

Stopping a 403(b) TSA contribution may be done at any time during the year.  In order to cancel your reduction, simply complete a Salary Reduction Agreement, indicating you wish to discontinue your contribution, and submit to payroll. 

Once a contribution has been stopped, a new salary reduction election will require a new Salary Reduction Agreement.  If contributions for a calendar year exceed $15,000, a Modified Maximum Amount Contributable worksheet is also required.

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May I contribute to more than one company?

Yes, currently it is the policy of most School Districts to allow contribution to multiple companies at the same time.

NOTE: IF YOU CHOOSE TO CONTRIBUTE TO MORE THAN ONE COMPANY, ALL COMPANIES AND THE AMOUNT OF THE CONTRIBUTION TO EACH COMPANY MUST BE INDICATED ON ONE SALARY REDUCTION AGREEMENT.

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How much may I contribute to my 403(b) TSA plan?

The basic maximum contribution to a 403(b) TSA plan in any calendar year is 100% of your includible compensation not to exceed $15,500. If you have completed 15 or more years of service, your ceiling may be raised to $18,500 (subject to certain restrictions).  If you are at least 50 years of age, you may contribute an additional $5,000.  You may use the years of service and age 50 catch up allowances separately or together.  Remember, a participant contributing in excess of $15,500 in a calendar year must submit a Modified Maximum Amount Contributable worksheet.

NOTE: THE CALCULATION OF MAXIMUM CONTRIBUTIONS IS COMPLEX AND INVOLVED. EXCESS CONTRIBUTIONS MAY BE SUBJECT TO ADVERSE TAX CONSEQUENCES AND POSSIBLE PENALTIES.  PROFESSIONAL CONSULATION REGARDING THE TAX EFFECTS OF YOUR 403(b) TSA CONTRIBUTION LIMITS IS STRONGLY RECOMMENDED.

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May I withdraw money from my 403(b) TSA plan?

As of January 1, 1989 403(b) TSA plans have withdrawal restrictions.  These restrictions allow withdrawals from 403(b) TSA’s only under certain conditions.

NOTE: THESE WITHDRAWAL RESTRICTIONS APPLY ONLY TO DEPOSITS MADE AND INTEREST EARNED AFTER DECEMBER 31, 1988.

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What restrictions are there on withdrawals from a 403(b) TSA?

Withdrawal of contributions and interest earned in a 403(b) TSA plan after January 1, 1989 can only be made under the following conditions:

1. Death or Disability;
2. Separation from Service;
3. Retirement;
4. Attaining the age of 59 ½ (age 55 under certain circumstances);
5. Financial Hardship
6. Contributions and earnings prior to January 1, 1989 may be withdrawn; however, consult your tax advisor for taxes and penalties that may apply.

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If I am eligible to make a withdrawal, are there penalties?

Even if you are eligible to withdraw funds from your 403(b) TSA, you will incur a 10% tax penalty as enacted by the 1986 Tax Reform Act unless one of the following criteria are met:

1. Death or Disability;
2. Retire during or after the calendar year you reach age of 55;
3. Distribution is in the form of a pay-out option based on your life expectancy and it is unchanged for 5 years or until you are age 59 ½ (whichever comes later);
4. Withdrawal is necessary to meet medical expenses of the participant or dependent of the participant and the expenses would be deductible as uninsured;
5. Reach the age of 59 ½;
6. Distribution is necessary pursuant to a Qualified Domestic Relations Order.

REMEMBER: GENERALLY, WITHDRAWALS OF ANY MONEY FROM A TAX-SHELTERED ACCOUNT PROGRAM ARE SUBJECT TO TAXATION AS ORDINARY INCOME IN THE YEAR WITHDRAWN. WITHDRAWLS BEFORE AGE 59 1/2 ARE SUBJECT TO AN ADDITIONAL 10% FEDERAL INCOME TAX PENALTY.

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May I take loans from my 403(b) TSA?

Many 403(b) TSA contracts allow for a loan to be taken against the value of the plan.  A loan provision is an important feature to a Tax-Sheltered Account plan because it is the only way to access funds in the account without current taxation or possible penalties. 

Not all 403(b) TSA contracts allow a loan provision.  It is always important to ask your provider about their loan provisions, such as; if you were missed or were late on a loan payment.

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After retirement, how do I get my money from a 403(b) TSA?

There are generally three methods of withdrawing funds for income from a Tax-Sheltered Account plan after retirement:

1. Withdrawal of funds as needed to provide for supplemental retirement income;
2. Annuitization – taking a fixed payment for a specified period of time.  Typically these payments range from a “period certain” to a life and/or life with “period certain” option;
3. Most Tax-Sheltered Account programs offer a life expectancy retirement option to meet the minimum required distributions beginning at age 70 ½ or later.

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How long may I defer taking income from my 403(b) TSA plan?

Generally, withdrawals from a 403(b) TSA plan can be deferred no later than age 70 ½ (special rules may apply if you are working after age 70 ½ ). 

Upon reaching age 70 ½ current tax law requires that minimum distributions be made.  If you do not withdraw the required minimum amounts, you may incur (under current tax law) a 50% excise tax on the required distributions. 

A special deferral to age 75 applies to account values prior to January 1, 1987 or employees working beyond age 70 ½.

NOTE: CONSULT YOUR TAX ADVISOR FOR SPECIFIC REQUIREMENTS.

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How do I select a 403(b) TSA plan?

The first step in selecting a 403(b) TSA plan is to obtain a list of approved 403(b) TSA companies (Service Providers) from the payroll office.  In addition to approved companies being listed, this list also includes the names and phone numbers of representatives who work with these plans. 

The following are some guideline questions to assist you in the selection of a 403(b) TSA plan. 

1. Is the plan being offered a fixed account, variable account, or mutual fund?
2. Does the plan have a guaranteed interest rate?
3. Are there any penalties imposed by the company for early withdrawal of funds?
4. Are there administrative fees?
5. Is there a sales charge for contributions?
6. Is there a deferred sales charge upon withdrawals?
7. What is the financial history of the company?
8. Is there a loan provision?
9. How is interest credited to the accounts?
10. Who determines the current interest rate and how long are current interest rates guaranteed?

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Do I need a 403(b) TSA representative?

No, in order to fully complete the enrollment process for a 403(b) TSA plan a Service Provider, Agent, Registered Representative or Investment Advisor Representative need not sign the Salary Reduction Agreement or the Modified Amount Contributable worksheet.

However because of the complexity of the Modified Maximum Amount Contributable worksheet, seeking professional assistance and tax advice is strongly recommended.

School Districts will not accept responsibility or liability for verifying the accuracy of a participant’s calculations.

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Who do I contact with questions?

Questions relative to 403(b) TSA investments should be addressed to your 403(b) TSA Representative or Service Provider. If you have questions relative to School District 403(b) TSA procedure, please contact your payroll specialist.

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