What Is a TSA Retirement Plan and How Does It Work?

A Tax-Sheltered Annuity (TSA), often referred to as a 403(b) plan, is a retirement savings vehicle designed primarily for employees of public schools and certain tax-exempt organizations. This type of plan allows eligible individuals to save for retirement with significant tax advantages. Contributions made to a TSA plan, and the investment earnings on those contributions, typically grow tax-deferred until withdrawal in retirement. The overarching purpose of these plans is to provide a structured way for specific employees to build retirement savings.

Eligibility and Plan Operation

Eligibility for a TSA retirement plan extends to employees of public educational institutions, including K-12 schools, colleges, and universities. Additionally, employees of certain 501(c)(3) tax-exempt organizations, such as hospitals, charities, and religious organizations, are generally eligible.

Contributions to a 403(b) plan are primarily made through salary reduction agreements. An employee elects to have a portion of their pre-tax income deducted directly from their paycheck and contributed to their plan account. While these are employer-sponsored plans, employer contributions are not universally guaranteed.

Contribution Rules

The Internal Revenue Service (IRS) sets annual limits on the amounts that can be contributed to 403(b) plans. For 2025, the maximum elective deferral an employee can contribute is $23,500.

Special “catch-up contributions” are available for participants aged 50 and older. For 2025, individuals in this age group can contribute an additional $7,500, bringing their total elective deferral limit to $31,000. Furthermore, starting in 2025, those aged 60 to 63 may be eligible for an increased catch-up contribution of $11,250, if their plan allows.

A less common, but significant, “15-year rule” catch-up contribution may apply to long-serving employees of certain organizations. This rule allows an additional contribution of up to $3,000 per year, with a lifetime maximum of $15,000, for employees with at least 15 years of service with the same eligible employer. The overall limit for all contributions, including both employee and employer contributions, is generally the lesser of 100% of the employee’s includible compensation or $70,000 for 2025.

Investment Options and Withdrawals

TSA plans typically offer two primary types of investment vehicles: annuity contracts and mutual funds. Annuity contracts are offered by insurance companies and can be fixed or variable, providing guaranteed payments or market-based returns respectively. Mutual funds are held within custodial accounts, offering diversification across various stocks, bonds, or other securities. The choice between these options depends on the plan’s offerings and the participant’s investment preferences.

Funds in a 403(b) plan are generally intended for retirement, meaning withdrawals without penalty typically occur at age 59½ or upon separation from service. Distributions taken before age 59½ are usually subject to a 10% early withdrawal penalty, in addition to being taxed as ordinary income. However, certain exceptions to this penalty exist, such as disability, qualified higher education expenses, or unreimbursed medical expenses exceeding a certain percentage of AGI.

Some plans allow participants to take loans against their vested balance, generally up to 50% of the vested amount or $50,000, whichever is less. These loans must be repaid with interest, which is paid back into the participant’s account. Upon separation from service, funds in a 403(b) can typically be rolled over into other qualified retirement accounts, such as an Individual Retirement Account (IRA) or a new employer’s 401(k) or 403(b) plan, without incurring taxes or penalties. Direct rollovers, where funds are transferred directly between financial institutions, are generally the safest way to ensure tax-deferred status.