When May I Withdraw the Money in my TSA?
RMD (Required Minimum Distribution)
Under the general rules, you may begin withdrawals at any time once you have attained age 59 1/2, and you are required by law to begin making withdrawals once you are age 70 1/2. If you are currently working, you can extend your Required Minimum Distribution to age 75.
If you separate from service with your employer prior to age 59 1/2, but after age 55, the law permits you to withdraw money from your Tax Sheltered Annuity with no tax penalties or restrictions.
If you die before you begin making any withdrawals from your Tax Sheltered Annuity (TSA), a surviving spouse. if applicable, may become successor owner of the TSA, with the same rights as you had, except that a surviving spouse may not make further contributions. If your beneficiary is someone other than a spouse, he or she may take the money as a lump sum or elect to stretch out the distribution over a period of years. The distribution rules are complicated, and it is important to comply with them to avoid tax penalties. Please consult a tax advisor prior to selecting a method of distribution.
There is a reason for the withdrawal restrictions on your TSA. When Congress enacted the law creating 403(b) plans, it intended for you to use your TSA as a retirement savings vehicle, not as a short-term tax-sheltered savings account.
Most fixed dollar and variable annuity contracts contain a temporary withdrawal charge. The withdrawal charge is a penalty which is assessed upon early withdrawal of the funds in the account. In most cases, the withdrawal charge grades down to zero over a period of years, but watch out for annuities with permanent withdrawal charges.
The withdrawal charge serves several purposes. On a fixed-dollar annuity, the insurance company must absorb any investment losses. Having a withdrawal charge permits the insurance company to invest in longer maturity investments with higher yields, and these higher yields are reflected in the current rate of return credited to your account. If there was no withdrawal charge, the insurance company could probably not afford to invest long-term, and shorter-term investments would mean lower interests rates on your annuity. The expenses associated with issuing your annuity are higher initially than in later years. The withdrawal charge allows the company a period of time in which to recover its initial costs through the spread, described earlier.
Mutual Funds might also have a withdrawal charge, known as a CDSC (Contingent Deferred Sales Charge). Normally, they start at 7% the first year and gradually go to zero after six years. Mutual fund companies all have a different CDSC, and the investor should carefully read the prospectus to ensure they understand all the withdrawal charges before investing.
Yes. The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) made it possible for you to borrow from your TSA. Most fixed dollar TSA contracts have a loan feature, as do some variable annuities and mutual funds. Loan provisions vary from company to company. The law permits you to borrow 50% of the withdrawal value of your TSA, so long as the loan does not exceed $10,000. If the amount borrowed is to exceed $10,000, the maximum loan is the larger of 50% of the withdrawal value of your TSA or $50,000. All loans must be processed and approved by your school district or Third Party Administrator.
The loan must be repaid in at least quarterly installments of principal and interest over a period not to exceed five years. There is one exception: If the purpose of the loan is to acquire a dwelling intended to be your principal residence within a reasonable time, the repayment period may be extended beyond five years with the agreement of the TSA company.
When making a loan, first check to see what rate of return the company will charge you on the borrowed amount. Then, find out what rate of return will be credited on the funds in your account set aside as collateral for the loan. You should take these things into consideration in deciding whether a TEFRA loan is better in your circumstances than borrowing from a bank or credit union.
Yes. IRS Revenue Ruling 90-24 permits partial or full transfers of TSA funds between fixed dollar annuities, variable annuities and 403(b)(7) custodial accounts. There are some restrictions and rules, so consult your representative before making such a transfer. The general rule is that all transfers must be conducted directly between the companies at your direction; meaning, you may not have the check made payable to you and then endorse the check over to the new company. All transfers must be processed and approved by your school district or Third Party Administrator.
In addition to tax free TSA transfers, you are eligible to conduct a rollover upon certain circumstances, including death, disability, separation from service with your employer or attainment of age 59 1/2. You may roll over a full distribution of your TSA funds into another TSA or into an IRA, within 60 days, tax free. Rollovers of partial distributions are permitted under certain circumstances.
The insurance company sets an initial rate of return which is credited to new premiums as they are received. This is called the current rate of return on new money. As premiums are received and invested, the company may place them in investment pools, and the rate of return on these pools is carefully monitored: When each contribution has been on deposit with the company for a period of time, the current rate of return is reviewed with reference to the earnings on the investment pool matched to that contribution. The company may then make an interest adjustment to bring the rate of return in line with the spread formula. For reputable companies, these adjustments are small, and are merely pricing adjustments required to maintain the target spread.
Watch out for sharply lower old money rates. Some companies entice you to choose their TSA by offering especially attractive initial rates of return, then sharply cut the old money rate. You may never know this, unless you ask. If the initial new money rate seems especially high when compared to other companies, be skeptical, chances are the company is trying to hook you with an appealing initial rate, then will reel you in later with a much lower old money rate.
All the attention is focused initially on setting up your TSA and selecting some of the best products suited for your circumstances. But the attention should also be given to the vital question of planning distributions from the TSA after retirement.
All TSA annuity contracts, whether fixed-dollar or variable, contain annuity pay out options. Pay out options, sometimes called settlement options, are different methods of systematically withdrawing the money in your TSA. A typical set of pay out options will include life only, life with period certain, joint and survivor, installment refund and period certain only annuity pay outs. All of these options are designed to liquidate the principal and interest in your account over a period of time that complies with IRS regulations for TSA distributions. In competition, companies often compare their annuity pay out rates for life and ten year certain annuities for participates at age 65. That is an accepted benchmark for comparison within the industry. However, experience shows that most TSA participants prefer to take their money out in other ways because the resulting interest in an annuitization may be low.
The IRS does require you to systematically withdraw the money in your TSA, once you reach a certain age. This is called the Required Minimum Distribution (RMD) and is usually age 70 1/2, but not always. Once you reach the RMD date, each year, you must withdraw a minimum amount in order to avoid a stiff 50% tax penalty imposed by the IRS.
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