Tax Shelters Annuities

Optional Pre-Tax Retirement Contributions

Employees of the Paramus Public School District have the option to enroll in tax-sheltered annuity plans. A tax-sheltered annuity (TSA), 403(b) or 457(b) are types of investment vehicles that let employees make pretax contributions into a retirement account from their income. Because the contributions are pretax, the Internal Revenue Services (IRS) does not tax the contributions and related benefits until the employee withdraws them from the plan. 

Benefits of having a tax-sheltered annuity plan: 

• A tax-sheltered annuity allows employees to invest income before taxes into a retirement plan.

• TSA plans are offered to employees of public schools and tax-exempt organizations.

• The IRS taxes the withdrawals, but not the contributions into the tax-sheltered annuity.

• Because employers can contribute to TSA plans, employees have the benefit of additional tax-free funds accruing.

• Charities, religious organizations, and other nonprofits can qualify to offer employees tax-sheltered annuities

Retirement Savings Through Tax-Sheltered Annuities 

The IRS caps contributions to tax-sheltered annuities at $23,000 for tax year 2024 (it was $22,500 for 2023), which is the same cap as 401(k) plans. TSAs also offer a catch-up provision for participants aged 50 or older, allowing an additional contribution of $7,500 each year for 2023 and 2024. 

Tax-sheltered annuities also include a lifetime catch-up provision for participants who have worked for a qualified organization for 15 years or more and whose average contribution level never exceeded $5,000 over that period. 

Withdrawals from all qualified retirement plans require may begin only after the age of 59½. Early withdrawals are subject to a 10% IRS penalty unless certain exemptions apply. The IRS taxes withdrawals as ordinary income and requires them to start no later than the year the beneficiary turns 73 or 75, depending on birth year. 

The district offers many options for tax-shelter providers and these plans allow employees to make pre-tax contributions from their paychecks.