What is a 403(b) Tax Sheltered Annuity?

A Tax-Sheltered Annuity (TSA), also known as a 403(b) plan is named after a section of the Internal Revenue Code. It is an employer sponsored retirement savings program. Participation is limited by law to employees of public educational organizations and certain nonprofit organizations. The vast majority of participants are teachers in public schools, colleges and universities.

Contributions to a TSA are made for the participating employee by his or her employer. The money that is contributed to the TSA comes either from employer contributions - which are called non-elective deferrals, or from employee contributions, called elective deferrals.

Elective deferrals are deducted from the participant's paycheck and forwarded to the insurance company or mutual fund custodian selected by the participant. The participant signs a salary reduction agreement giving the employer the authority to make the paycheck deduction and remit it to the chosen company. Most TSA contributions are elective deferrals.

You may contribute 100% of your compensation subject to the elective deferral limit of $16,500 for 2009. For individuals age 50+, an additional $5,500 can be contributed for 2009. If a 403(b) participant has 15 or more years of service, they may be eligible for an additional "catch-up" provision. A "catch-up" provision of $3,000 is available only if the participant has not contributed on average more than $5,000 per year into a 403(b) account. An averaging calculation must be done to ensure that the option is available. A lifetime limitation of $15,000 applies to this special "catch-up' provision.