Tax-Deferred Annuity (TDA)

Tax-Deferred Annuity TDA 403(b) Retirement Planning Public School Employees Charitable Organizations
A retirement vehicle permitted under Section 403(b) of the U.S. Internal Revenue Code for employees of a public school system or a qualified charitable organization.
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Definition of Tax-Deferred Annuity (TDA)

A Tax-Deferred Annuity (TDA) is a retirement investment vehicle that allows employees of public school systems or qualified charitable organizations to defer taxes on their contributions and earnings until they begin receiving distributions in retirement. The TDA is authorized under Section 403(b) of the U.S. Internal Revenue Code. Contributions grow tax-free until withdrawal, and the account holder (annuitant) is taxed only on the portion of the distributions that exceed the initial investment upon receipt.

Key Features of TDA

  • Eligibility: Employees of public school systems and qualified charitable organizations.
  • Contribution Limits: In 2011, the maximum annual contribution was $16,500, plus an additional $5,500 for those over age 50 eligible for catch-up contributions.
  • Tax Benefits: Contributions and earnings grow tax-deferred, meaning taxes are paid upon withdrawal instead of during the growth period.
  • Withdrawal Phase: Taxation occurs at the time of distribution, with the annuitant being taxed on amounts that exceed their investment in the annuity.

Examples of Tax-Deferred Annuities

  1. Example 1: Teacher’s Retirement Account
    • A high school teacher opens a 403(b) plan with a TDA through her school district, contributing $15,000 annually. The earnings accumulate tax-free, and she pays taxes only when she withdraws the funds in retirement.
  2. Example 2: Non-Profit Employee’s Annuity
    • An employee of a non-profit organization contributes $20,000 over two years into a TDA. As he is over the age of 50, he also makes catch-up contributions. He ultimately benefits from tax-deferred growth until he retires and starts withdrawing funds.

Frequently Asked Questions (FAQs)

Q1: Who is eligible to contribute to a TDA?

  • Eligible participants include employees of public school systems and qualified charitable organizations.

Q2: What are the contribution limits?

  • For 2011, the limits were $16,500 annually, plus an extra $5,500 for those aged 50 or older through catch-up contributions.

Q3: When are taxes paid on a TDA?

  • Taxes are paid upon withdrawal during retirement and only on the amount that exceeds the investment in the annuity.

Q4: Can contributions to a TDA lower my current taxable income?

  • Yes, contributions to a TDA lower your current taxable income as they are tax-deferred.

Q5: Are there penalties for early withdrawal?

  • Yes, generally, early withdrawals before the age of 59½ may incur penalties and taxes.
  • Section 403(b): A section of the U.S. Internal Revenue Code that provides tax-deferred retirement plan options for employees of public schools and certain non-profit organizations.
  • Catch-Up Contributions: Additional contributions allowed for individuals aged 50 and older to their retirement accounts.
  • Annuitant: The individual who receives the benefits from an annuity contract.
  • Tax-Deferred: Refers to investment growth that is not subject to tax until the funds are withdrawn.

Online References

Suggested Books for Further Studies

  1. The 403(b) Answer Book by Gary S. Lesser
  2. 403(b) Investing Guide 2023 by Taylor Larimore
  3. Retirement Plans: 401(k)s, IRAs, and Other Deferred Compensation Approaches by Bernard J. Corrigan and Jane Quinn

Fundamentals of Tax-Deferred Annuity (TDA): Retirement Planning Basics Quiz

### Who is eligible to receive a Tax-Deferred Annuity (TDA)? - [x] Employees of public school systems and qualified charitable organizations - [ ] Employees of private corporations - [ ] Self-employed individuals - [ ] Only those earning less than $50,000 annually > **Explanation:** TDAs are available to employees of public school systems and qualified charitable organizations, as specified under Section 403(b) of the U.S. Internal Revenue Code. ### What is the purpose of tax-deferral in a TDA? - [x] To allow contributions and earnings to grow without immediate tax consequences - [ ] To avoid taxes altogether - [ ] To ensure immediate access to funds - [ ] To reduce the need for financial planning > **Explanation:** Tax-deferral allows contributions and earnings to grow tax-free until the time of distribution, thus deferring tax liabilities to retirement. ### What is the maximum annual contribution for a TDA for individuals under age 50 in 2011? - [ ] $14,000 - [ ] $15,000 - [x] $16,500 - [ ] $17,000 > **Explanation:** In 2011, the maximum annual contribution for a TDA under Section 403(b) was $16,500. ### At what age are individuals allowed to make catch-up contributions to a TDA? - [ ] 45 - [ ] 48 - [x] 50 - [ ] 55 > **Explanation:** Individuals aged 50 or older can make additional catch-up contributions to their TDAs. ### When are taxes due on the earnings of a TDA? - [ ] Upon earning the income - [x] Upon withdrawal during retirement - [ ] Every year - [ ] Never > **Explanation:** Taxes on the earnings of a TDA are deferred and are due upon the withdrawal of the funds in retirement. ### What happens if you withdraw from a TDA before age 59½? - [x] You may incur penalties and taxes - [ ] You get a tax refund - [ ] No tax implications - [ ] Withdrawal is not allowed > **Explanation:** Early withdrawals, typically before the age of 59½, often incur penalties and taxes. ### What section of the U.S. Internal Revenue Code authorizes TDAs? - [x] Section 403(b) - [ ] Section 401(k) - [ ] Section 457(b) - [ ] Section 529 > **Explanation:** TDAs are authorized under Section 403(b) of the U.S. Internal Revenue Code. ### Can TDAs lower your current taxable income? - [x] Yes, contributions are tax-deferred - [ ] No, contributions do not affect current income - [ ] Yes, but only if over a certain amount - [ ] No, only earnings are tax-deferred > **Explanation:** Contributions to a TDA are tax-deferred, thus lowering the individual’s current taxable income. ### When are taxes paid on the distributions from a TDA? - [ ] Every month - [ ] At the time of earning - [x] Upon receiving the distributions in retirement - [ ] Never > **Explanation:** Taxes on TDA distributions are paid when the annuitant receives the benefits in retirement. ### Do TDAs provide tax benefits during the accumulation phase? - [x] Yes, they grow tax-free until withdrawal - [ ] No, each year taxes must be paid - [ ] Only if below certain income thresholds - [ ] Yes, except for the contributions > **Explanation:** TDAs provide tax benefits by allowing contributions and earnings to grow tax-free until they are withdrawn.

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