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Web posted
Monday, January 12, 2004
Annuities can aid retirement plan
By Lon G. Wilson
For the Journal
Spending pleasant, worry-free years in retirement is a top goal for just about everyone. We know we should be putting money aside to build a nest egg, but where can our hard-earned funds work hardest for us? For many Americans, the answer is in tax-deferred retirement vehicles. A tax-deferred investment allows funds to accumulate at a faster pace than in a taxable one, because you don't pay taxes on the accumulated funds, interest, or dividends until you actually withdraw the money. (Withdrawals prior to age 59 1/2 may be subject to income taxes and a 10 percent IRS penalty.)
You're probably familiar with many of the popular tax-favored retirement arrangements such as IRAs, Keoghs, 401(k)s and funding vehicles such as annuities. But if you're an employee of a tax-exempt organization or a public educational organization, you may be eligible for a 403(b) plan, commonly referred to as Tax-Sheltered Annuities (TSAs). These plans share many similarities with 401(k) plans, but only employees of certain not-for-profit organizations and public educational institutions are eligible to participate.
TSAs are better than ever
TSAs have long been an excellent way to accumulate funds. With the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001, TSAs are even better. If you choose to participate, you may be able to defer up $12,000 in 2003 - up from the previous limit of $10,500 - into your TSA. In 2004 to 2006, this limit will continue to increase by $1,000 each year, so that by 2006, the elective deferral limit will be $15,000 annually. Since your pre-tax contributions are conveniently deducted from your paycheck, TSAs can be a great way to regularly "pay yourself first," putting money aside for tomorrow rather than spending it all today.
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In addition, the new tax law, signed into law on June 7, 2001, provides for special catch-up provisions for employees who are age 50 and older. These individuals can contribute an additional $2,000 in 2003, $3,000 in 2004, $4,000 in 2005, and $5,000 in 2006. The new age 50-and-older catch-up provisions are in addition to the existing 15 year catch-up provisions that allow employees of educational institutions, hospitals, religious organizations, home health service agencies, and health service with their present employer, to potentially defer up to $3,000 annually with a lifetime catch-up maximum of $15,000.
Twin tax advantages
Among the key benefits of TSAs are their twin tax advantages. First, TSA contributions are made on a pre-tax basis, which lowers your current federal income tax burden. Second, TSA funds accumulate tax-deferred. The funds remain untaxed until you withdraw them, usually at retirement. Over the long haul, these two tax advantages may add a significant amount to your retirement dollars. (Withdrawals prior to age 59 1/2 may be subject to income taxes and a 10 percent IRS penalty.)
Although referred to as Tax-Sheltered Annuities, the funding vehicles for TSAs are not limited to annuities and may include mutual funds or life insurance in addition to annuities. And among annuities, often both fixed and variable policies are available. (The sale of mutual funds and annuities is strictly regulated, and there are limits on the amount of insurance that can be sold for such a purpose).
To maximize the TSA's tax advantages, it's a good idea to get started as soon as possible and put the "power of time" to work. If you think your organization fits the TSA guidelines, check with your personnel manager to see if your employer offers such a program. If they do, you may want to give serious consideration to signing on. If your employer is eligible but does not have a TSA plan in place, you may want to drop a note in the suggestion box.
Lon G. Wilson is president and chief operating officer of The Wilson Agency LLC in Anchorage. He can be reached via e-mail at lonw@thewilsonagency.com.
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