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A 403b plan is an employer sponsored retirement savings plan that is only available to employees who work for governmental, educational, and nonprofit organizations.

TSAs can be funded by employees and by employers with pre-tax dollars. The limits are the same as for 401K plans: $16,500 in deferrals in 2010, with an extra $5,500 if you are age 50 or older. There is a limitation on the amount that can be contributed. People who have been with an organization for more than 15 years can contribute additional funds. The method of funding is not automatic, unlike other qualified retirement plans. Also, Social Security taxes are due on the amount contributed.

Withdrawals are taxed as ordinary income in the year the money is withdrawn. Whether the withdrawal is also subject to a 10% penalty depends on the purpose (there is no penalty for withdrawal due to Hardship or Disability) and your age.

If you need cash, consider the alternatives before making a withdrawal or taking a loan from a TSA or any other retirement plan. We suggest that you read our information on handling a financial crunch.

On death, the proceeds are payable to your beneficiary. There are limitations on how a beneficiary receives the funds.

For more information, please see:

Withdrawals For Hardship

TSA's may permit Hardship Withdrawals.

A Hardship Withdrawal is a provision that allows you to withdraw money from your plan due to "an immediate and heavy financial need" for specific reasons.

Unhappily,  TSAs only allow you to make a withdrawal of funds for hardship if you had the account before December 31, 1988, and then only to the maximum of the amount of funds in the account as of that date. Hardship withdrawals are not permitted for accounts started after December 31, 1988 or for moneys deposited after December 31, 1988 for accounts opened prior to that date.

"Hardships" include:

  • Medical expenses 
    • Medical expenses in excess of  the threshold for deductibility. The threshold for the itemized deduction for unreimbursed medical expenses is 10% of the taxpayer’s Adjusted Gross Income (AGI). However, in the years 2013–2016, if either the taxpayer or the taxpayer’s spouse has turned 65 before the close of the tax year, the threshold is 7.5% of AGI. In 2017 the 10% threshold will apply to all taxpayers. Since, by definition, you exceed the threshold over which medical expenses can be deducted, the tax savings from the medical expense deductions may help offset the additional taxes due from the distribution.
  • Purchase of a primary residence: 
    • As with an IRA account, you can withdraw up to $10,000 without penalty for the purchase of a primary residence - the place where you will live most of the time, as opposed to a vacation or second home.  A withdrawal to purchase a primary residence is allowed only once in a lifetime. (To learn more about IRAs, see: IRA)
  • To avoiding eviction from your home
    • You will automatically be granted a hardship withdrawal if the money is used to avoid eviction. However, a hardship withdrawal made for this reason does not avoid the 10% premature distribution penalty.
  • Payment of one-year's college tuition and expenses 
    • The hardship rules allow you to withdraw an amount equal to one-year's college tuition and expenses.

The Definition Of A 403(B) Plan Also Known As A "TSA"

A 403b plan is an employer sponsored retirement savings plan that is only available to employees who work for governmental, educational, and nonprofit organizations.

An educational or nonprofit organization is one that operates exclusively for religious, charitable, scientific, public-safety testing, literary or educational purposes. It can also be an organization that prevents cruelty to children or animals or that fosters national or international sports competition.

403(b) plans are named after section 403(b) of the Internal Revenue Code. They are sometimes called "Tax-Sheltered Annuities" or "TSAs" because the investment options are very limited. A commonly chosen option is an annuity contract provided by a life insurance company.

What Are The Benefits Of A 403B Plan?

A 403B Plan is an excellent way to put money away for retirement or disability. It may also be a source of cash in financial crisis.

The Benefits of a 403B plan include:

Saving pre-tax dollars.

    • A 403(b) account, like a 401K Plan, or Individual Retirement Account, allows you to exempt part of your salary from current income taxes

Tax-deferred growth of your money.

A 403(b) account lets that money grow without paying any taxes on the earnings of growth until you take the funds out of the Plan.

Extra income.

Your employer can make additional contributions to your TSA account which are tax free to you.

Forced savings.

A TSA can help you save. The money is taken out before you receive your paycheck. For many people, money they never see is money they don't miss.

Professional investment management.

TSA plans allow you to invest in professionally managed annuities and mutual funds that you might not have access to if you were only depositing a little bit of money at a time.

  • Available cash should you need it.
    • Although you may have to pay penalties for making an early withdrawal or pay interest if you take a loan, you may be able to get your hands on the money when you need it (for instance, to pay for medical expenses).

Limitation On The Amount Of Contributions To A TSA

For the year 2010, the maximum you can contribute to a TSA is $16,500 ($23,000 if you are age 50 or older). If you've been with your organization for more than 15 years you can also contribute an additional amount. (See the next section). This amount is adjusted for inflation when the rate of inflation applied to the maximum contribution amount equals at least $500.

If your employer has any other employee retirement plans, such as a 401K, or Simple IRA, the limit applies to both plans combined.

If You Have Been With The Organization For More Than 15 Years

If you have worked for certain types of organizations for more than 15 years, you may be able to elect to use a special "catch-up" rule to increase the amount you can contribute to your plan. Check with your organization to see if you are eligible.

If the rule is elected, the limit on the amount that can be contributed will be increased by the least of:

    • $3,000
    • $15,000 minus previous catch-up amounts used.
    • $5,000 times the number of years of service reduced by the amount of your employer's contributions that were tax-deferred.

How Contributions To The Plan Are Made

Your salary is reduced by the amount of annual contributions to which you agree. You will have to sign an agreement with your employer specifying the amount of money by which you want your salary to be reduced. 

The deduction will continue until you change the agreement with your employer. You can only change the agreement once a year. If you've already changed the amount you want your salary reduced by in any given year, you will be stuck with that decision for the rest of the year.

Also, even though your salary may have been "reduced," you will still have to pay Social Security taxes on the amount of the reduction. 

Permitted Investments For Money In A TSA

A drawback of a TSA is that your investment options are usually quite limited.

There are only two types of funding vehicles approved for TSAs:

  • Annuity contracts from a life insurance company
  • The certificates of a few mutual funds.

Your plan administrator will have details about your investment options.

When considering how to invest your money in a TSA, consider your overall investment strategy. Revisit your decision at least once a year.

On the plus side, you may be able to move your assets between annuity contracts.

To Learn More

More Information


Borrowing From A TSA

If your plan allows, you can borrow up to the lesser of 50% of the value of your account or $50,000.

The maximum term for the loan is five years. If you borrow to buy a principal residence, you can pay it back over a longer period of time. 

If you are thinking about borrowing from your TSA account, be sure to read Borrowing Money From A 401K, TSA Or Other Defined Contribution Retirement Plan

If You Become Disabled

If you become disabled as defined by your Plan, you can withdraw money from your TSA without an early distribution penalty.  You will, however, have to pay income taxes on the distribution.  The money will be counted in with your "ordinary income," meaning it gets added to the rest of your income that year before the tax is calculated.

Some plans define disability with the same wording as in the Social Security law, such as with respect to Social Security Disability Insurance law. To learn more, including how to increase the chances of a favorable determination, see: SSDI 101.

If You Leave Your Employer Before Age 59 1/2

Your options for handling the money you receive from your account include:

  • Withdrawing the money from the account.
    • You can only withdraw funds from your TSA account at limited times. If you are under age 59 1/2, you will have to pay regular income taxes and a 10% penalty on the amount of the withdrawal. Your employer will be required by law to withhold 20% of the amount distributed to assure the tax and penalty are paid.
  • Transferring the funds to a new employer's plan.
    • The money in your TSA can be transferred to another employer's plan. If your money is transferred directly from one plan to another, no tax or penalty will be payable and taxes will not be withheld.
  • Transfer the money to an IRA rollover, or "conduit IRA."
    • You can transfer the money from a TSA plan to a new IRA. All the money must go directly from one institution to another to avoid any tax or penalty. It is advisable to not add to or withdraw from this IRA account after transferring money from a TSA into it. You may lose the option of one day transferring the funds to another employer's plan.
  • Take withdrawals from your account over the course of your life.
    • This option allows you to withdraw from your account every year. The amount that you must withdraw is based on your life expectancy. If you take this option, you must withdraw at least the minimum amount every year. The simplest method divides your account balance each year by the life expectancy indicated in IRS Publication 590 at offsite link. The life expectancy used does not take your health into consideration.

NOTE: If you are at least 55 and retiring, you can take withdrawals from the account without paying any penalty, although the withdrawals will be subject to income tax.

Remember, with a TSA account, your contributions and earnings on those contributions are always fully vested.

If You Retire Or Leave Your Employer And You Are Older Than Age 59 1/2

If you retire or leave your job after age 59 1/2, you will be eligible to make withdrawals from your TSA plan without penalty. However, you will have to pay income taxes on the distribution.

Your options for where to keep the money are the same as if you leave your job before age 59 1/2: you can leave the money with your employer, withdraw it all as a lump sum, roll it over to an IRA, or do a trustee-to-trustee transfer. To learn more, see If You Leave Your Employer Before Age 59 l/2, above.

Forced Withdrawal Of Money From A TSA At Age 70 l/2

You must start taking minimum withdrawals from you plan by April 1 of the later of the year after you reach age 70 1/2 or the year in which you actually retire.

If you don't take the required withdrawals, you will be faced with a possible 50% penalty tax on the amount you failed to withdraw.

What Happens To The Money In A TSA If I Die?

If you die, the full amount of your TSA account goes to your beneficiary.

If you have already started receiving distributions from the account, your beneficiary may continue to receive the payout according to the schedule that you started. Or, if the beneficiary wishes, he or she can receive greater amounts.

If you have not started receiving a payout:

  • If the beneficiary is your spouse: he or she may be able to rollover the account to an IRA and treat the IRA as his or her own.
  • If your beneficiary is not your spouse, the distribution must be taken within 5 years or over the course of their life expectancy.

To Learn More

More Information

IRAs: Rollovers