About Tax Sheltered Annuities

A tax-sheltered annuity (TSA) plan is a retirement savings program authorized by section 403(b) of the Internal Revenue Code for employees of educational institutions, churches, and certain non-profit agencies. It allows eligible employees to set aside up to virtually 100% of their income for retirement.

The UW TSA Plan is for supplemental retirement savings and participation is voluntary. You make the entire contribution. There is no employer match. For most employees, the University contributes to the Wisconsin Retirement System, the state’s primary pension plan.

All permanent, project, and Limited Term Employees (LTEs) of the University of Wisconsin as well as rehired annuitants, student hourly employees, and graduate assistants – with the exception of some employees-in-training, fellows, and interns – are eligible to participate.

Eligible employees can enroll at any time.

The Board of Regents of the University of Wisconsin System established the TSA 403(b) Plan as of October 1977. A ten-member faculty/academic staff committee, the Tax-Sheltered Annuity Review Committee (TSARC), advises the UW president on the Plan. Among its duties, the TSARC is responsible for reviewing criteria used to select TSA investment companies (sometimes referred to as vendors), monitoring performance of the TSA companies and recommending appropriate actions, and setting the level of the fee for participation.

There are four important reasons to participate in the UW TSA Program:

  1. It's an easy way to accumulate additional savings you will need to supplement your retirement income.
  2. You can make either pre-tax or Roth after-tax contributions or a combination of both options.
  3. It is a flexible, low-cost program with a wide array of investment options.
  4. It’s portable. You can take your savings with you if you move to a different employer.

Retirement is expensive. Your WRS pension and Social Security will provide only part of what you will need. The rest must come from personal savings.

On top of that, people are living longer. And instead of working longer most of us would like to retire earlier. Some of us may even be retired longer than we will have worked! That is a fine goal, but we must figure out a way to pay for it.

Remember, you need to plan your retirement for your life expectancy. Consider modern medicine and the possibility that you could be retired for 40 years!

No. We all have diverse investment objectives that must be met with different investment techniques. The investment objective for a TSA 403(b) account is retirement security.

If you buy shares of a mutual fund with non-403(b) dollars, you owe taxes each year on the dividends and capital gains your fund realizes. If you sell one fund and buy another, you owe taxes on the profit.

In a 403(b) investment, you get to keep and invest the tax money you would otherwise owe each year. The extra dollars pro­duce more earnings. You can shift your money among funds without incurring fees or capital gains taxes. Though you must pay income tax on the money you withdraw from your TSA pre-tax account, your net return will be higher than with a taxable account earning the same return. A qualified distribution from a Roth after-tax account is tax-free.

No. You get full Social Security and the Wisconsin Retirement System credit for the salary you contribute to your TSA account.

The University has negotiated low-cost investment options:

  • All funds are no-load: there are no sales commissions or broker fees. In addition, none of the mutual funds has 12b-1 (marketing or advertising) fees.
  • UW TSA investment companies have no annual fees.
  • Most investment choices have lower than average expense ratios.
  • You have access to funds with special low-cost share classes like Fidelity K shares and TIAA-CREF Institutional-share class.
  • You can move your investments within the TSA Program without incurring tax liabilities.
  • Beginning in 2014, there is no university participation fee.

It is sadly ironic that those who most need to save for retirement often have the hardest time doing it. Take a close look at your budget and you may find money to save. Of course, if you have credit-card debt, it is important to pay that off first.

Saving early is the easiest way to accumulate money because time is on your side.

Consider three hypothetical employees:

  • Ms. Jones contributes $75 per month for ten years – from age 25 to 35 – and nothing after that.
  • Mr. Smith starts later but contributes more – $100 per month for 25 years, from age 40 to 65.
  • Ms. Green begins saving $300 per month at age 50.

Assuming that all the investments earn 7% per year, this chart shows their total accumulations at age 65.

tsa-qa-figure-1-15

Chart Summary
NameInvestedEarnings
Ms. Jones$9,000$89,206
Mr. Smith$30,000$48,747
Ms. Green$54,000$39,859

In this example, investing a small amount early resulted in more retirement earnings than investing a much larger amount later.

Because of compound interest, the money you contribute now is very valuable. And once you set aside some money, you may find – as many others have reported – that you don’t even miss it.

Keep your long-term goals in mind and decide what's truly important to you. Perhaps you can cut down on movies and dining out, tighten your clothing budget, or find less expensive ways to entertain at home.

There are lots of resources available to give you direction on how to budget your money and how to find the money to save. You can start by looking at the investment companies’ web sites in the TSA Program. Visit the TSA Investment Companies page for links to their websites.