How Much Can Be Contributed to a Tax-Deferred Annuity?
Tax-deferred investments of some public education and tax-exempt organizations are called tax-sheltered annuity programs (TSAs), tax-deferred annuity programs or 403(b) plans. The Internal Revenue Service sets annual contribution limits for these funds.
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Limits
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In 2010, participants in tax-deferred annuity plans could contribute up to $16,500 of their salaries. Catch-up provisions allowed employees 50 and older to contribute an additional $5,500. In 2010, the combination of employee and employer contributions was limited to $49,000 or 100 percent of compensation--whichever was less. Some participants also qualified for a $3,000 lifetime catch-up deferral.
Benefits
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Pretax contributions to a tax-deferred annuity reduce the amount of taxable income in the year they are contributed. Tax-deferred annuities allow these funds to grow tax-free; over time, the compounding effect enhances appreciation in the fund. Funds withdrawn later in life, usually when the participant is in a lower tax bracket, add more value.
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Considerations
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Many tax-deferred annuities or 403(b) plans offer annuity investments to participants. Since annuities already receive tax-deferred treatment outside of a tax-deferred plan, investors may want to consider other investments offered by their plans.
Misconceptions
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Insurance companies sometimes market annuities as "tax-deferred annuities." However, these annuities allow investors to contribute after-tax funds that then grow tax-deferred.
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References
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