One of my biggest financial regrets is how late I started investing in my tax advantaged accounts. I didn’t even pay attention until I took my first school principal job in a new district and the HR Director was talking me through my contract and benefits. It went like this:
“Do you want to put some money into the TSA?”
“The what?”
“It’s a tax sheltered annuity.”
Me (thinking that sounds like a very sketchy thing): “No.”
Fortunately, I went home and did some research. A tax-sheltered annuity is a very sketchy thing. However, my actual options were something better! I started a (too) small contribution for the first time after 10 years in education.
So, let’s talk about tax-sheltered annuities, why they cause so much confusion, and what you do, or don’t want to do with them.
What Is a Tax Sheltered Annuity?
A tax sheltered annuity, commonly referred to as a TSA, is a retirement plan that allows pre-tax contributions. You are allowed to contribute a certain amount each year (see: 2020 contribution limits) pre-tax, and then will pay tax on withdrawals after your retirement date. That is the tax sheltered portion.
The annuity portion comes from the fact that these accounts used to include only annuity plans. An annuity is an investment product (usually from an insurance company) which promises to pay a steady stream of income in the future.
403b
In education, when people refer to “a TSA” they are almost always referring to a 403(b) account.
The 403b, for education and non-profit employees, does include the tax sheltered benefits. Many compare it to the private sector 401k – though educators almost never get a match.
Importantly, the 403b is not limited to annuities. While some districts still (unfortunately) continue to offer only annuity plans, the 403b can include a wide range of investment providers and options.
For example, my 403b includes several insurance companies that offer annuities. However, I also have access to brokerages, including my preferred: Vanguard.
Most public educators have access to a 403b through their employer. If you haven’t yet – take a minute to find out what 403b options you have in your district.
Why We Should Drop the Term “Tax Sheltered Annuity”
Using “tax-sheltered annuity” or “TSA” to refer to the 403(b) is inaccurate at best. I believe it to be intentionally misleading. Its continued use benefits insurance companies offering high fee options. Educators should have access to a wide variety of investments and not simply annuity products.
Continued use of the term TSA emphasizes the annuity option and helps employers justify offering only bloated insurance products. Responsible districts should provide educators with more options!
As a consumer, I’d heard that annuities were a scam product, and so the offer of a “TSA” immediately caused me to resist a helpful retirement savings option. For others, being offered a TSA may cause them to select an annuity without further research.
It would be better for retirement savings in general if we used better names than tax code references like 401k and 403b, but at least those are accurate. TSA no longer is!
Why You Should Probably Avoid a TSA (but not a 403b)
You’ve probably noticed I’m averse to annuities in general and may be wondering why. Annuities are usually very high fee products with confusing (and expensive) clauses that tend to benefit those selling annuities far more than those buying them.Annuities tend to favor financial sale people more than investors.
An annuity may have a place in your financial plan, but I would only make that determination after consulting an advisor or if you are very confident in your understanding of the product and your financial goals.
Many newer educators simply trust insurance sales people or those advisors that show up in the staff room. Then they end up in expensive annuities. I believe there are better products that are less complex and lower fee.
Those who support annuities (that aren’t just salesmen increasing their income) believe that annuities provide important stability in retirement income. For teachers that have a pension they trust, there are almost certainly better investments.
I prefer index funds, but you should make your own financial decisions. Just educate yourself about fees, surrender charges, and the other complexities of annuities before making that choice. Consult a fee-only financial advisor if you prefer not to go the do it yourself route.
Also, make sure you understand all retirement options available to you as an educator. We often have more than one usable retirement vehicle! Compare your 403b and 457b options to see which may work best for you. I share more of my thinking on these products in the Educator Investing Order of Operations.
| DON’T | DO |
| Mindlessly invest in an annuity because an insurance salesmen tells you it’s a good idea. | Invest in Retirement Accounts. Learn about: Pension IRA (individual retirement account) 403b 457b Choose the best option for your financial plan |
Summary
A tax-sheltered annuity is an outdated term that (in the education profession) refers to the 403b. Some districts only offer annuity options, but an increasing number offer other investment products that may make more sense for you.
We should drop the term TSA and use the more accurate term 403b to avoid emphasizing annuities.
Annuities tend to be unnecessarily complex and expensive. Tread carefully before putting money into an annuity. Explore your retirement savings options!
Other Readings:
- Investopedia Annuity Guide
- 403b Wise: A website dedicated to K-12 403b. It explores why so many only have terrible options and what you can do about it.
- 15 Things You Should Know About Annuities
- Why Annuities Are Bad For Almost Everyone
- Pfau: Annuities Are Better Than Bonds For Guaranteed Income
