How TSAs work in practice

When an eligible employee enrolls in a TSA, they specify a percentage or dollar amount to be automatically deducted from each paycheck. These contributions bypass immediate taxation and go directly into the chosen investment vehicles. The funds then grow tax-deferred until withdrawal, typically during retirement.

Distribution rules

Understanding the distribution rules is crucial for TSA participants:

1. Regular distributions can begin at age 59½ without penalty.
2. Early withdrawals before age 59½ typically incur a 10% penalty unless qualifying exceptions apply.
3. Required Minimum Distributions (RMDs) must begin at age 73.
4. Loans may be available from some plans, subject to specific limitations.

Comparing TSAs to other retirement options

While TSAs share similarities with 401(k) plans, they have distinct characteristics:

TSAs vs. 401(k)s

• TSAs are limited to specific employers (educational and non-profit sectors).
• Investment options may be more limited in TSAs.
• Both have similar contribution limits and tax treatment.
• TSAs often have lower administrative costs.

TSAs vs. traditional IRAs

• TSAs have higher contribution limits.
• TSAs may offer employer matching in some cases.
• IRAs typically provide more investment flexibility.
• Both offer tax-deferred growth.

Potential drawbacks and considerations

While TSAs offer significant benefits, they’re not without limitations:

• Investment restrictions: Many TSAs limit investment options to annuities and a selection of mutual funds, potentially constraining investment strategies compared to other retirement accounts.
• Fees and expenses: Some TSAs carry higher fees than other retirement options, particularly those heavily invested in annuity products. Understanding the fee structure is crucial for maximizing long-term returns.
• Early withdrawal penalties: The 10% early withdrawal penalty can be significant for those needing access to funds before retirement age, though certain hardship exceptions exist.

Making the most of your TSA

A few considerations to keep in mind that could help you optimize your tax-sheltered annuity:

Strategic planning tips

1. Evaluate employer matching if available and contribute enough to capture the full match.
2. Diversify investments within plan options.
3. Review fees and expenses annually.
4. Consider combining TSA savings with other retirement accounts for optimal tax planning.
5. Stay informed about contribution limits and catch-up provisions.

Common mistakes to avoid

• Neglecting to rebalance investments periodically.
• Overlooking fees and their long-term impact.
• Failing to coordinate TSA strategy with other retirement accounts.
• Not updating beneficiary designations when life circumstances change.

The takeaway

Tax-sheltered annuities represent a valuable retirement planning tool for employees in the education and non-profit sectors. While they come with certain limitations, their tax advantages and potential for long-term growth make them worth considering as part of a comprehensive retirement strategy. Success with TSAs requires understanding their unique features, carefully evaluating investment options, and integrating them effectively with other retirement planning tools.

The key to maximizing TSA benefits lies in early participation, consistent contributions, and strategic investment choices aligned with your retirement goals. As with any retirement planning decision, consulting with financial and tax professionals can help ensure your TSA strategy supports your overall financial objectives.

Let Peachtree help

At Peachtree Financial Solutions, we’ve helped thousands of people get their money sooner by purchasing their future annuity payments for a lump sum of cash. Selling your payments is a regulated process and we have a lot of experience with these transactions. And while every annuity is unique, which means every payment sale will be different, they all have the same basic five steps:

1. Call one of our representatives.
2. Receive a free, no-obligation quote for the sale of your payments.
3. Review and sign the purchase agreement.
4. We process the agreement with your insurance company.
5. You get your cash!

Why should you choose Peachtree?

It’s all part of something we call the Peachtree Promise: our experienced, dedicated representatives listen to your goals and clearly explain your available options. We meet you where you are without judgement and work hard to help you meet your financial goals. Getting your quote is completely free, and you’re under no obligation to sell to us if you aren’t completely satisfied with what you hear.