Workers have several different options to choose from when it comes to retirement savings, and some employees have the ability to use multiple retirement accounts to save. IRAs are generally available to anyone who has earned income, but only some employers offer additional ways to save for retirement. Although 401(k) plans are the most popular, an alternative known as a tax-sheltered annuity, or TSA plan, is available to many workers, especially in the nonprofit world and among certain public-sector employers such as public schools. Knowing how IRAs and TSA plans work can help you make the most of your retirement savings options.
IRAs vs. TSA plans
IRAs have certain advantages over other types of retirement savings vehicles. They are the most flexible, allowing you to invest in just about any investment asset you want, subject only to restrictions on permissible investments within the tax laws themselves. Contribution limits for 2016 are $5,500 for those younger than age 50 and $6,500 for those 50 or older, and certain income limitations apply to the deductibility of traditional IRA contributions as well as to your ability to make contributions to Roth IRAs at all.
TSA plans, on the other hand, have many of the added benefits of other employer plans. Contribution limits are higher, amounting to $18,000 for 2016 for those who are younger than 50, or $24,000 for those 50 or older. In addition, those workers who have 15 or more years of service can boost their annual contribution by as much as $3,000 for a set number of years if the plan elects to allow such additional contributions. Unlike with IRAs, employers can add their own contributions to TSA plans if they so choose, and participant loans and in-service withdrawals are available depending on the terms of the plan in some cases.
The major downside to TSA plans is that they require you to choose from among tax-sheltered annuity options. As a result, administrative and investment-related costs can be much higher than they'd be in an IRA, depending on the choices you would make for IRA investments. For those who are interested in the features that tax-sheltered annuities offer, however, a TSA plan can be the ideal vehicle to let them save for retirement.
Finally, the withdrawal rules for IRAs and TSA plans are similar, but there are some minor differences. Withdrawals taken from an IRA before age 59 1/2 are generally subject to a 10% penalty unless an exception applies. For a TSA plan, however, you can take withdrawals as early as age 55 without penalty once you've left the job that provides you with access to the plan.
All in all, using IRAs and TSA plans in combination can be a smart way to save for retirement. By taking advantage of the positive features of both, you can put together a retirement saving strategy that will take you the furthest toward your financial goals.
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