# Tax-Sheltered Annuity (TSA): What It Means and How It Works

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## What Is a Tax-Sheltered Annuity (TSA)?

A tax-sheltered [annuity](https://www.investopedia.com/terms/a/annuity.asp) (TSA), or [403(b) plan](https://www.investopedia.com/terms/1/403bplan.asp), is a type of investment vehicle that lets an employee make [pretax](https://www.investopedia.com/terms/p/pretaxcontribution.asp) contributions into a retirement account from income. Because the contributions are pretax, the [Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp) does not tax the contributions and related benefits until the employee withdraws them from the plan.

Since the employer can also make direct contributions to the plan, the employee gains the benefit of having additional tax-free funds accruing.

### Key Takeaways

*   A tax-sheltered annuity allows employees to invest income before taxes into a retirement plan.
*   TSA plans are offered to employees of public schools and tax-exempt organizations.
*   The IRS taxes the withdrawals, but not the contributions into the tax-sheltered annuity.
*   Because employers can contribute to TSA plans, employees have the benefit of additional tax-free funds accruing.
*   Charities, religious organizations, and other nonprofits can qualify to offer employees tax-sheltered annuities.

## Understanding Tax-Sheltered Annuities (TSAs)

The [403(b) plan](https://www.investopedia.com/terms/1/403bplan.asp) is a tax-sheltered annuity in the U.S. This plan provides employees of certain nonprofit and public education institutions with a tax-sheltered method of saving for retirement. There is usually a maximum amount that each employee can contribute to the plan, but sometimes there are catch-up provisions that allow employees to make additional contributions to make up for previous years when they did not maximize contributions.

The IRS caps contributions to TSAs at $23,000 for tax year 2024 (it was $22,500 for 2023), which is the same cap as 401(k) plans. TSAs also offer a catch-up provision for participants aged 50 or older, which totals $7,500 each year for 2023 and 2024.

Tax-sheltered annuities also include a lifetime catch-up rule for participants who have worked for a qualified organization for 15 years or more and whose average contribution level never exceeded $5,000 over that period. Including the contribution, catch-up provisions, and an [employer match](https://www.investopedia.com/terms/m/matchingcontribution.asp), the total contribution cannot exceed 100% of earnings up to a certain cap.

All [qualified retirement plans](https://www.investopedia.com/terms/q/qrp.asp) require that withdrawals begin only after the age of 59½. Early withdrawals are subject to a 10% IRS penalty unless certain exemptions apply. The IRS taxes withdrawals as ordinary income and requires them to start no later than the year the beneficiary turns 73 or 75, depending on birth year.

> **Important**
>
> Depending on the employer's or plan provider's provisions, employees may access funds before age 59½ via a loan. As with most qualified retirement plans, they may also permit withdrawals if the employee becomes disabled.

## Tax-Sheltered Annuities (TSAs) vs. 401(k) Plans

People often compare TSAs to [401(k)](https://www.investopedia.com/terms/1/401kplan.asp) plans. Both plans encourage individual savings by allowing for pretax contributions toward accumulating retirement savings on a tax-deferred basis.

From there, the two plans diverge. Notably, 401(k) plans are available to any eligible private sector employee who works for a company with a plan. TSA plans are reserved for employees of tax-exempt organizations and public schools. Nonprofit organizations that exist for charitable, religious, or educational purposes and are qualified under Section [501(c)(3)](https://www.investopedia.com/terms/1/501c3-organizations.asp) of the [Internal Revenue Code (IRC)](https://www.investopedia.com/terms/i/internal-revenue-code.asp) can offer TSA plans to employees.

## How Does a Tax-Sheltered Annuity Work?

A tax-sheltered annuity, or 403(b) plan, is a type of retirement plan offered by certain organizations, such as churches, non-profit organizations, and public schools. This plan works like other retirement plans—employees can contribute a portion of their annual salaries up to a certain amount each year. These contributions are made on a pre-tax basis. Earnings grow tax-free, which means they aren't taxed until the plan owner begins making withdrawals during retirement.

## Can You Take a Loan from a 403(b) Plan?

You may be able to take a loan from your 403(b) plan if your employer allows it. Keep in mind that plans aren't required to provide loans from tax-sheltered annuities. If you need to take a loan from your TSA, check with your plan administrator about your rights and responsibilities.

## What's the Difference Between a Tax-Sheltered Annuity and a 401(k)?

Both the TSA and 401(k) are retirement plans that come with certain tax advantages for investors. Each allows plan holders to contribute a portion of their salary each year up to a maximum ($23,000 in 2024 and $22,500 in 2023).

Also called 403(b) plans, TSAs are designed for employees of churches, non-profits, and public schools while 401(k)s are established by for-profit corporations.

## The Bottom Line

Saving for retirement doesn't need to be difficult, especially when your employer offers a retirement plan. Take advantage of tax-sheltered annuities (403(b) plans) if you work at a church, non-profit, or public school if your employer has one available. You can reap the benefits of tax advantages, such as using pre-tax dollars for your contributions, and you may even be able to get free money in your account if your employer matches your contribution, giving you more bang for your buck.

> **Article Sources**
>
> 1.  Internal Revenue Service. "[IRC 403(b) Tax-Sheltered Annuity Plans](https://www.irs.gov/retirement-plans/irc-403b-tax-sheltered-annuity-plans)."
>     
> 2.  Internal Revenue Service. "[Retirement Plans FAQs Regarding 403(b) Tax-Sheltered Annuity Plans](https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-403b-tax-sheltered-annuity-plans)."
>     
> 3.  Internal Revenue Service. “[Retirement Topics - 403(b) Contribution Limits](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-403b-contribution-limits).”
>     
> 4.  Internal Revenue Service. "[401(k) Limit Increases to $23,000 for 2023, IRA Limit Rises to $7,000](https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000).”
>     
> 5.  Internal Revenue Service. "[Publication 571 Tax-Sheltered Annuity Plans (403(b) Plans)](https://www.irs.gov/pub/irs-pdf/p571.pdf)," Page 6.
>     
> 6.  Internal Revenue Service. "[Publication 571 Tax-Sheltered Annuity Plans (403(b) Plans)](https://www.irs.gov/pub/irs-pdf/p571.pdf)," Page 11.
>     
> 7.  Internal Revenue Service. "[Retirement Plan and IRA Required Minimum Distributions FAQs](https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions)."
>     
> 8.  Internal Revenue Service. "[Retirement Topics - Exceptions to Tax on Early Distributions](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions)."
>     
> 9.  Internal Revenue Service. "[401(k) Plans](https://www.irs.gov/retirement-plans/401k-plans)."
>     
> 10.  Internal Revenue Service. “[401(k) Plan Qualification Requirements](https://www.irs.gov/retirement-plans/plan-sponsor/401k-plan-qualification-requirements).”