If you work for a school, a church, or a non-profit organization and are considering different ways to save for retirement, a tax sheltered annuity plan should be at the very top of your list.
The Facts about a Tax Sheltered Annuity Plan
If you work for a non-profit, a church, or a school, you've probably been offered a tax sheltered annuity plan, more commonly known as a 403(b) plan. In many ways, this investment plan is nearly identical to a 401(k) that many private corporations offer. However, there are also a number of differences. A 403(b) plan gives you the opportunity to build up a retirement fund and ensure that you'll have a comfortable income into your old age.
How It Works
When you sign up for a 403(b) through the tax-exempt organization you work for, you can set aside money out of every paycheck on a pre-tax basis. You pick a vendor to handle your investment and every payment you make goes to your retirement fund. You can't take any money out of the 403(b) plan before retirement without paying a significant penalty fee, so if you decide to put money into such a plan, make sure that it's money you can do without until retirement. Once you reach retirement age, you can start taking distributions from the fund.
There aren't a lot of requirements for you to qualify for a 403(b) plan. If you work for a non-profit organization and that organization arranged a vendor or vendors to manage an annuity plan for employees, then you very likely qualify. Even though you do qualify, there are certain limits as to what extent you can take advantage of the plan. You can only contribute up to a maximum amount each year.
For example, in 2010, the IRS allowed people to contribute up to $16,500 to their retirement plan in that year. Additionally, employees over 50 years of age were allowed to contribute an additional $5,500 as part of a "catch-up" program instituted by the government. These amounts tend to change every year or every few years, so check the IRS website for the latest specifics.
There are a long list of benefits to taking advantage of a 403(b) retirement plan. In fact, if you have one available to you, most financial planners recommend taking full advantage of it. In many ways, once you retire you receive much more back than you ever put in. The following are the largest benefits of the 403(b):
- When you put money into the plan, you are only taxed on your remaining income. This means that if you make $50,000 a year and you invest $10,000 to your 403(b) plan, you only pay taxes on $40,000 of your income. Over the years, this tax savings adds up significantly.
- As you put money into the fund and it grows, the amount that it goes up to is tax-deferred. As a comparison, when you invest in the stock market and earn a profit, you have to pay capital gains on what you earned that year. On the other hand, when your annuity grows, you don't pay any capital gains. You're only taxed on the payments you receive once you start drawing income from the fund.
- You are guaranteed an income when you retire and that income is taxed at a lower rate because at the time of retirement you're earning much less income.
As you can see, the potential benefits of investing a bit of your salary to a tax deferred annuity plan can be tremendous. You can avoid paying taxes on some of your current income, pay no capital gains on the growth of your investments, and, once you do withdraw money, you're taxed at a much lower rate.
If you work for a non-profit organization and you're not sure if a 403(b) plan is available, talk to your employer. Even if they don't currently offer one, they might consider it. To learn more, check out the following resources.
Make sure to do your homework and carefully consider your retirement possibilities. It may not be easy today, but once you retire you'll be very glad you did.