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TSA or IRA?

By Amir Zaman, WEA Insurance employee benefits specialist

May 1997

If it's one or the other, choose TSA

While an Individual Retirement Account (IRA), and a Tax-Sheltered Annuity (TSA) are alike in some ways, they are very different in other ways. Both types of accounts shelter money from taxation until you take it out. When possible, you should take advantage of both IRAs and TSAs to maximize retirement savings. But if you can contribute only to one of the two, choose the TSA. Here's why:

  • The majority of WEAC members can contribute more to a TSA than to an IRA.
  • All lawful TSA contributions are immediately deductible from taxable income. IRA contributions are tax deductible only if annual income is less than specific statutory limits.
  • Unlike an IRA, you use payroll deduction to contribute to a TSA.
  • If you retire at age 55 (the earliest age you can receive Wisconsin Retirement System benefits) or older, you can take money out of your TSA without any tax penalties. With an IRA, you have to be at least age 59? to avoid tax penalties.

Here are some details on the points above:

Contribution amount

You can contribute a maximum of $2,000 per year per person to an IRA, or $4,000 per year for a married couple filing jointly.

The maximum contribution limit to a TSA can be as high as $9,500 for members with fewer than 15 years of employment, and higher for some with longer employment (ask your TSA representative to calculate your actual limits). In addition, TSAs give you the advantage of built-in "catch-up" provisions which allow you to contribute more during some years to make up for not contributing in prior years.

Tax deductibility

Unfortunately, one of the major tax benefits of an IRA is lost when your income exceeds certain limits. If you're single, you can fully deduct your IRA contribution only if your adjusted gross income (AGI) is under $25,000. The ceiling is $40,000 combined AGI for a married couple. The amount you can deduct decreases as your income rises. There's no deduction after a single person's AGI reaches $35,000 or a married couple's reaches $50,000.

All TSA contributions (not exceeding contribution limits) are immediately deducted from taxable income regardless of what you or your spouse earn.

Payroll deduction

Unlike with an IRA, you use payroll deductions to contribute to a TSA — a much easier and efficient way to save. Further, under a new law, you can change the amount you put into your TSA during a year.

Taking money out

If you take money out of an IRA prior to age 59?, whether you are retired or not, you will be subject to federal and state penalties (10% federal, about 3.33% state). There are a few exceptions, such as when proceeds are used to pay for medical expenses that exceed 7.5% of adjusted gross income, or to buy health insurance after at least 12 weeks of unemployment.

If you retire (from the employer from which your TSA contributions were made) at age 55 or older, you may take money from your TSA without tax penalty. If you do not retire, then you must wait until age 59? to avoid the tax penalty. Generally, the rules provide only for "hardship" withdrawals prior to retirement, and they are subject to tax penalties.

Be aware that your TSA company may extract a "withdrawal fee" or "surrender penalty" even after these ages. Consult your contract or representative if you are unsure. The WEA Tax Sheltered Annuity Trust does not assess any surrender or withdrawal charges.

If you'd like to know more about TSAs or what you can contribute, talk to one of our Retirement Consultants. You can reach them at 1-800-279-4030.

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At WEA Insurance, we know we have a responsibility to do things efficiently. The premium dollars we receive are entrusted to us by members who expect we'll use every dollar wisely. We do. Consider just one example of how we provide greater value than commercial insurance companies.

This chart compares us with three other insurers who provide group health insurance to school districts. The chart compares our expense ratio (the percentage of total premium that's used for running the program) and our loss ratio (the percentage of every dollar that we pay out in claims) with the others. You'll note that we pay out a larger share of premiums for benefits than the other insurers and we do it more efficiently.

In simple terms, it means that out of every dollar that we received, we used less than 8 cents for administration of our program, and returned almost 92 cents as benefits. That's one of the best records in the country.

Posted April 28, 1997