Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted on Help Smart Phone and MEL Magazine.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com.

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Mar 19, 2020

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What is a 403a annuity?

A 403a annuity is an annuity that can only be purchased through the workplace and is purchased with before taxed money. There are actually two types of 403 annuities: 403a and 403b.

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A 403a annuity is a work-sponsored annuity that any for profit organization can utilize while a 403b annuity is a work-sponsored annuity that can only be utilized by non-profit organizations. A 403a annuity is pretty much the same thing as a regular annuity except that it is employer sponsored.

What this means for you is that you can contribute much less money to your annuity in weekly, biweekly or monthly installments (depending on how you get paid). A standard annuity typically has a $2000 minimum, something that you don’t have to worry about with a 403 annuity.

Although a 403a annuity is paid for with after tax dollars, you will still eventually have to pay taxes on your annuity. Once you withdraw money from your annuity, it will be subject to taxes at the same rate as your income level. Receiving your annuity in one lump sum will subject you to higher taxes.

There are some big difference between a standard annuity and a 403a annuity that move beyond the amount of money you can invest each week. Keep reading to learn more about 403a annuities and whether they are right for you.

How much can you save with a 403a annuity?

Unlike a standard annuity, there is actually an annual limit that you can contribute to a 403a annuity with before tax dollars. You can continue to contribute to your annuity with after tax dollars with as much money as you want. However, your contributions must be made directly from your paycheck, so it is likely that your overall contributions will be somewhat limited.

The annual before tax dollars amount will vary based on your income level, but the maximum amount for those in a high income tax bracket is $16,500 each year; the lowest income bracket will have a maximum before tax contribution of $2,000. You can learn what your maximum contribution by speaking to your human resources department.

Your employer can also contribute to your annuity. They can save money on their taxes by contributing to your annuity, however, they have a maximum contribution amount as well. Again, this is based on your overall income, but the total for a high income tax bracket is $32,500. Although your employer can contribute more, they cannot claim any more tax savings on further matching.

It is very unlikely that your employer will contribute to your annuity in such a high amount. Even if they have a dollar to dollar matching plan, most have a maximum contribution level of $2,000 to $5,000. There is no hard and fast rule about employer fund matching, this just happens to be an average.

You can, of course, contribute as much as you want to your annuity with after tax money if you reach your before tax maximum. The benefit here is that when it comes time to cash in your annuity the money you contribute that comes from after tax money is not taxable. While all of your gains are taxable, the government cannot tax you twice for the same monies, which would be your initial after tax investment.

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If you cash in your annuity before you are 59 and 1/2 you will be taxed a penalty interest rate of an additional 10% over your regular taxes. This means that if you are fired, laid off or quit the company that you are contributing with, you will probably want to roll over that money into a self-directed IRA. Not every company allows for a roll over, so before you start your contribution, make sure that you check with HR to ensure that you can roll your investment into something else first.

The good news is that if you use the money from your annuity to pay for college, then you will not have to pay any taxes on your investment at all. That includes the gains for your investment. If you are saving for your child’s education rather than your retirement, for example, then you have a tax-free way to accomplish this.

Are there downsides to choosing a 403a annuity?

Many people feel that a major downside to using a 403a annuity is that the employer is not allowed to manage the annuity nor are the employees allowed to manage their own annuity. Employers are required, by law, to use an investment advisor to control the annuity investments.

You, as an employee, have to trust your employer to choose the right investment advisor to manage the annuities. If the advisor mismanages the funds, your employer is liable. However, those funds aren’t insured and if the loss is large enough and your employer can cover the losses, then you are simply out of luck. If the annuities lose money due to poor investments by the advisor, then you have no recourse at all.

A 403a annuity also doesn’t carry a guaranteed return on your investment like a standard annuity will. Because you are purchasing an annuity essentially through the company you work for, you have no promise of a return. When you purchase directly from an insurance company, you will receive a guarantee of return as well as a guaranteed minimum amount that your investment will earn.

Many people also consider it a downside that they cannot directly invest in their annuity; they have to have the money withdrawn from their paycheck. This, however, shouldn’t be too big of a deal. If you want to make a larger investment then increase the amount withdrawn from your pay. If you already have the money to invest, then you won’t have to worry about having too much money withdrawn from your salary.

Of course, if you find yourself in a finically difficult situation, you cannot stop the money from being withdrawn from your pay, at least not with any sort of speed. This can be very frustrating. What’s more, it could potentially lead to a financial crisis.

You can surrender your annuity just as you can any other annuity. You may find, however, that your employer has strict rules about when and how you can surrender your annuity, make sure that you understand all of the terms of your employers 403a annuity before you invest.

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What are some alternatives to choosing a 403a annuity?

There are several investments that you can choose that don’t require huge funds to start. An IRA, for example, can be opened with as little as $25 to $100. CDs and bonds are also great low start up investments.

If you want to start an annuity but you don’t want a 403a annuity, you have several options for that as well. You can choose between single premium immediate annuities (SPIAs) and single premium deferred annuities (SPDAs), which both require very large initial investments, or flexible premium annuities, which require about $2,000 to start.

You can also choose annuities that pay out for the rest of your life, but require a larger overall investment, or an annuity that pays out for a specified period of time, such as for 10, 20 or 30 years. If you want, you can also receive your deferred annuity benefit in one lump sum, but if you pay with before tax dollars then you will face the same higher tax rate as someone with a larger income would.

No matter what type of independent annuity you choose to invest in, there are going to be a certain amount of fees. By using our free quote tool, you can compare the fees between companies for different types of investments and determine which company is right for you.

Enter your zip code and compare free online annuity quotes today!