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Tax Sheltered Annuity
What is a tax sheltered annuity? A tax sheltered annuity (TSA) is a means of reducing your taxable income while keeping your savings safe. In many cases, these are offered through an employer and are governed by the rules set by the issuer as well as the employers rules.
Tax sheltered annuities are a popular alternative to certificates of deposit or traditional savings accounts because taxes on interest earned are deferred until the money is withdrawn. This allows money to grow at a much faster rate than with any fully taxable savings plan.
Lets say you have $50,000 to invest and you wont need the money for at least ten years. You could invest in either a certificate of deposit (CD) or an annuity. Assuming both investments paid you 5% interest, you would have a total of $81,445 in ten years time with the annuity, but only $71,214 with the CD because taxes on the CD must be paid annually.
Many school teachers and hospital workers are offered tax sheltered annuities in their retirement plans. Money is invested in an employer-sponsored tax sheltered annuity on a monthly basis, unlike most other annuities, where the money is deposited in a lump sum. Also with a tax sheltered annuity, all the money is qualified money, or money that has not yet had the taxes paid on it. Employer-sponsored tax sheltered annuities may come with the added perk of employer contributions to the fund.
Individual Tax Sheltered Annuity
An individual may also choose to invest in an annuity plan on his or her own. However, to be eligible for the tax shelter benefits, the IRS has established some rules which include early withdrawal penalties. These penalties are designed to encourage a person to save toward retirement. If you withdraw money from a TSA before you reach a certain age, usually 59.5, taxes must be paid on the amount withdrawn. In addition, you will be charged a percentage penalty. Tax shelter annuities can be excellent supplemental investments as long as the investor does not need to withdraw funds early.
So what if you need money now? If you have a tax sheltered annuity and have a need for a lump sum of cash now you have two options: you can sell your annuity or you can cash it in. Either way there will be tax ramifications. Its best to consult an expert before making any major decisions with your money. At Buysellannuity.com were here to help.