Tax-Sheltered Annuity (TSA / 403(b)): What It Is and How It Works

What is a TSA?

A tax-sheltered annuity (TSA), commonly called a 403(b) plan, is a retirement savings plan that lets eligible employees make pre-tax contributions from their pay. Contributions and investment earnings grow tax-deferred; the IRS taxes distributions as ordinary income when withdrawn in retirement.

Who qualifies

TSA plans are offered by:
* Public schools and educational institutions
* Charities, religious organizations, and other tax-exempt nonprofits (typically 501(c)(3) organizations)

How TSAs work

• Employees elect to defer part of their salary into the 403(b) on a pre-tax basis (reducing current taxable income).
• Contributions are invested and grow tax-deferred until distribution.
• Employers may also make contributions or match employee deferrals, increasing retirement savings.

Contribution limits and catch-up rules

• Elective deferral limit (2024): $23,000 (same nominal cap as many 401(k) plans).
• Age 50+ catch-up: an additional $7,500 (applies in recent years including 2023–2024).
• Special 15-year “lifetime” catch-up: employees with 15+ years of service at a qualified organization who historically contributed low amounts may be eligible for additional catch-up contributions under specific IRS rules.
• Total contributions (employee + catch-up + employer) are subject to overall IRS limits and may not exceed 100% of compensation up to those limits. Check plan documents and IRS guidance for exact caps.

Withdrawals, penalties, and required distributions

• Distributions are taxed as ordinary income when taken.
• Early withdrawals (before age 59½) are generally subject to a 10% IRS penalty unless an exception applies (for example, disability, certain hardships, or other circumstances allowed by law).
• Required minimum distributions (RMDs) must begin by the age specified in current IRS rules (ages have shifted under recent legislation—confirm the applicable RMD age for your birth year).

Loans and in-service access

• A 403(b) may permit loans or in-service withdrawals, but plans are not required to offer them. Check your plan’s provisions for availability, repayment rules, and tax implications.

How TSAs compare with 401(k) plans

Similarities:
* Both allow pre-tax salary deferrals and tax-deferred growth.
* Both have annual contribution limits and catch-up provisions.

Differences:
* 403(b)/TSA plans are for employees of public schools, certain nonprofits, and churches; 401(k)s are offered by private-sector employers.
* Investment options, plan features (such as loan availability or employer match), and administrative rules can differ between 403(b) providers and 401(k) plans.

Practical takeaways

• If you work for a school, nonprofit, or church and your employer offers a 403(b), it’s a valuable way to save for retirement using pre-tax dollars.
• Maximize employer matching if available — it’s effectively free money.
• Review your plan’s rules on catch-up options, loans, and early withdrawals.
• Consult IRS publications or a tax/financial advisor for limits, RMD ages, and special catch-up eligibility specific to your situation.

Sources and next steps

Primary guidance on 403(b) rules, contribution limits, catch-up provisions, penalties, and RMDs is available from IRS publications and retirement plan FAQs. Check your plan documents and the IRS for current limits and rules, or consult a financial professional to apply these rules to your circumstances.