Section 403(b) Tax Deferred Annuities
Questions and Answers
A Tax Deferred Annuity gives you the opportunity to supplement other retirement savings plans and enjoy favorable tax advantages along the way.
An annuity is a contractual agreement between you and a life insurance company. In return for the deposits you make during your working years, the company promises to pay you monthly payments for a designated period of time. Only a life insurance company can offer an annuity that guarantees payments for life.
In 1974, along with other code changes, paragraph (7) was added to IRS Code Section 403(b). While previously 403(b) participants were limited to choosing between fixed and variable annuities, Section 403(b)(7) added a third investment option - mutual funds having custodial arrangements with a recognized financial institution. For the first time, participants were able to take advantage of the financial opportunities of mutual fund accounts, including the popular "no load" funds.
You can defer 100% of earned income up to a limit of $15,500 for the calendar year of 2007. During the year of your 50th birthday, you may contribute an additional $5,000.
You should investigate a tax deferred annuity (TDA) if:
- You pay substantial amounts of federal income taxes.
- You are in a dual income family.
- You are single, with no dependents.
- You are investing money on an after-tax basis for long-term goals.
- You have sufficient emergency funds.
Contributions to a tax deferred annuity are deposited into the plan on a pre-tax basis. In addition, interest earnings accumulate on a tax-deferred basis.
To establish a TDA plan, you must complete an application and a salary reduction agreement form, which, in effect, reduces your taxable salary. Your employer will automatically reduce your paycheck by the amount you designate and will contribute that portion to the plan.
No. With your employer’s permission, you can establish your salary reduction agreement to make up for the months you missed so far. For example, if you wish to deposit $100 a month but did not sign up until June; you could make your agreement for $200 a month until the end of the year and $100 a month thereafter.
Yes. You may terminate your salary reduction agreement at any time.
If you remain eligible for a TDA, you have several options:
- Continue your present contract with your existing carrier with your new employer.
- Leave your present contract on paid-up status, if the account value is at least $600, and begin a new contract with an insurance company offered by your new employer.
- Transfer the value of your present account to a new contract with an insurance company offered by your new employer. No taxes will be due if the transfer is executed properly.
- Take a lump sum distribution. The distribution amount is includeable as income for the year and taxed accordingly. (A 10% IRS early withdrawal penalty may be imposed if you are not 59½.)
- Choose an annuity option. Annuity payments are taxable as received.
If you do not remain eligible for a TDA, you may choose either option 4 or 5, or:
Yes. You may have a TDA in addition to your IRA. Because federal and state rules and regulations differ between IRAs and TDAs, it is generally agreed that it is best to maximize your TDA contributions before starting an IRA. You may also be a participant in other savings or retirement plans your employer provides.
If you are nearing retirement age, you may be able to make larger salary reductions due to your years of accumulated past service and thus take maximum advantage of the program until retirement.
The IRS prohibits withdrawal of elective contributions and earnings on those contributions except for:
If money is withdrawn for one of the above reasons, ordinary income tax must be paid. In addition, the contract itself may impose withdrawal or surrender charges. Also, a 10% tax penalty may be imposed by the IRS if you have not attained age 59½. If you qualify for a hardship withdrawal, your contributions must be suspended for six months following the withdrawal.
Policy loans are permitted by law. The maximum loan amount is generally 50% of account value, not to exceed $50,000, and must be repaid in five years or it will be considered a taxable distribution. Insurance companies are not obligated to offer a loan provision.
Generally, the IRS requires that a participant must begin receiving retirement benefits no later than April 1 following the year in which the participant reaches age 70½. However, if still employed by an eligible employer, the participant may defer making withdrawals until retirement/separation from service.
You may select from the following retirement distribution options:
- Lump sum
- Annuity option:
- Life income
- Life income for two payees
- Cash refund life annuity
- Payments of a stated dollar amount
- Payments of a stated period of time
If you die before taking an annuity and your named beneficiary is your spouse, your contract may stay in force on a paid-up status with your spouse as the contract holder. Your spouse may choose any form of distribution that was available to you, such as lump sum distribution or annuitization. Your spouse would also have the option of a rollover to a 401(a), 403(b), governmental 457(b) plan, or IRA.