Retirement plans come in a variety of accounts recognized by the IRS. One such account is a 403a annuity that is a company-sponsored retirement plan. These plans are tax deferred, with the investment held under the shelter of an annuity. There are several requirements that a 403a annuity must maintain in order to qualify for its tax benefits.
A 403a annuity is a retirement annuity established with the Internal Revenue Code, Section 457. It's a deferred compensation plan that is established by an employer and is not self-directed by the person the annuity is held in trust for. This annuity can function as a pension plan, profit sharing or individual retirement account. These types of retirement annuities are most popular with public and government organizations.
Independent Investment Advice
The company that establishes the 403a annuity must have independent investment advisement. This adviser has sole authority on all investment decisions with the money in the annuity. All contributions made into the annuity on behalf of employees is managed by discretionary authority. This makes these plans unpopular, because annuity owners trust the investment adviser. It also creates liability for the company and adviser if the funds are not managed appropriately according to fiduciary responsibility.
A 403a annuity can also be utilized as a 529 Plan. These accounts are designed to fund education and pay other educational expenses, growing tax deferred. If money is used for educational purposes, it can be withdrawn tax-free. This account can be held as a custodial account for a minor or owned by an adult and pay for a child or grandchild's schooling. If the money is not used for school purposes, it can continue to grow until needed or withdrawn and added to income tax.
When an annuity is held until age 59 1/2, the money can be withdrawn and is added to a person's annual income tax. If it's withdrawn before age 59 1/2, there is a 10 percent tax penalty added to the amount withdrawn as well as being added to income tax. When a person reaches age 70 1/2, he is required to take minimum distributions that are determined on an annual basis on the amount in the annuity.
Depending on how the 403a annuity was created, it may be eligible for a rollover if an employee leaves the firm. Most individual retirement annuities and profit-sharing plans are eligible to be rolled into a self-directed IRA post-employment. Employees should consult with Human Resources and the annuity administrator regarding pension plan qualifications for rolling these type of annuity funds after employment has ended.