Retirement
Teachers: Don't Be Fooled by the "Tax-Sheltered Annuity" Account
June 2, 2020
The primary retirement account type for employees of non-profit organizations, including schools, libraries, and hospitals, is called a 403(b). The 403(b) structure is what provides the tax deferral of contributions under the Cash or Deferred Arrangement rules. For those who work in businesses, the 401(k) structure is the equivalent type of account.
It has been nearly 50 years since the 403(b) was born, and early on "annuities" — contracts issued by insurance companies — were the only available investment option. A lot has changed over the past five decades, including the investment options available in 403(b) accounts, but the account is still quite often referred to as a tax-sheltered annuity, or TSA.
How to tell whether you own an annuity
How do you know whether you are investing directly into mutual funds or accessing them through "sub-accounts" in an annuity?
- If the company you are investing through is an insurance company, there is a good chance it is an annuity structure.
- Check whether you own "shares" or "units." If it is the latter, it is definitely an annuity.
- Look for the words "contract" and "surrender charge." These are telltale signs you are in an annuity contract.
Why it matters
In a word: cost. Annuities generally cost more than mutual funds. There may be features an individual is specifically seeking, such as a guaranteed death benefit, but most often people are simply not aware of the differences, or of the fees they are paying.
When saving for long-term goals like retirement, fees really matter. Familiarize yourself with your retirement plan options, ask questions, and stay informed.