What is a TSA?
The 403(b) plan, often referred to as a tax-sheltered annuity (TSA), was created in 1958 specifically to give teachers and employees of other nonprofit organizations the opportunity to save money on a tax-deferred basis. It's like the 401(k) plans available to private-sector workers but with fewer regulatory controls.
On January 1, 2006, a new savings feature became available to TSA or 403(b) plan sponsors as an option for plan participants—the Roth TSA. Now TSA contributions can be before-tax or after-tax (Roth) or a combination of the two.
Before-tax or after-tax. What’s the difference?
Roth contributions are taxed now, but qualified withdrawals, including earnings, are tax-free. When you retire, you will owe nothing on years of compounded earnings, which may be a significant amount. Conversely, when you make your TSA contributions on a before-tax basis, it reduces your taxable income now and defers payment of taxes until the time you withdraw the money.