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Definition: Tax Sheltered Annuity
A Tax Sheltered Annuity is a financial arrangement that allows an individual to make contributions to retirement plan from his or her income. These contributions are deducted from his or her income and hence do not fall in the category of taxable income unless the employee decides to withdraw these from the plan.
These lead to additional accruing of tax-free funds. Normally there is a maximum limit up to which the employees can make these contributions, but can also make up for the years when they did not make the maximum contributions.
The main pros and cons of a tax sheltered annuity include the following
• The flexibility that is offered in making the contributions
• May be limited to those employees selected by the employer
• May involve higher administrative costs
• Leads to greater flexibility for the employees
• If the terms of the plan allow, then even loans can be taken against the contributions
• In-service withdrawal is permitted but is subject to a penalty as given in the plan. Withdrawal is permitted if i) the employee has reached an age of 59.5 years ii) the employee has severed from the employment iii) the employee has died or become disabled iv) the employee is encountering financial hardships etc.
Tax sheltered annuity is a voluntary plan and the contributions are made solely by the employees through deductions in their pay-rolls although employers can also make contributions. Normally, the tax-sheltered annuity is availed by public schools, colleges, universities, ministers etc.