What Is a TSA (Tax-Sheltered Annuity) Retirement Plan?

A tax-sheltered annuity plan is the original name for what is now called a 403(b) retirement plan. It works much like a 401(k) but is available only to employees of public schools, certain tax-exempt nonprofits, and some clergy. You defer part of your salary into the account before federal income tax is calculated, the money grows tax-deferred, and you pay tax when you withdraw it in retirement. For 2026, the basic salary deferral limit is $24,500, with additional catch-up amounts for older workers and long-tenured employees.¹

Who Can Offer and Join One

Only three types of employers can sponsor a 403(b): public schools (including public colleges and universities), organizations that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code, and churches or church-related organizations. In practice, that covers hospitals, charities, private universities, religious organizations, and K-12 school districts. Certain ministers qualify even when their employer is not a 501(c)(3), and self-employed ministers are treated as working for a qualifying employer for 403(b) purposes.²

If your employer offers a 403(b) to anyone, it generally has to offer it to everyone. The IRS calls this the “universal availability” requirement. A few narrow categories can be excluded, such as employees who typically work fewer than 20 hours a week, certain student workers, and nonresident aliens. Churches and qualified church-controlled organizations are exempt from universal availability altogether.³

How Contributions Work in 2026

Contributions run through a salary reduction agreement. You tell your employer to withhold a set dollar amount or percentage from each paycheck, and that amount goes into the plan before federal income tax is calculated.⁴ That lowers your taxable income for the year.

The basic elective deferral limit for 2026 is $24,500.¹ That cap covers what you personally defer, whether pre-tax, Roth, or a mix. Employer contributions don’t count against it.

Catch-Up Contributions

Three separate catch-ups can stack on top of the $24,500 base:

If you turn 50 or older during 2026, you can add $8,000, for a total of $32,500.¹
If you are 60, 61, 62, or 63 during 2026, a SECURE 2.0 “super catch-up” replaces the $8,000 figure with $11,250, taking the maximum to $35,750.¹
A 15-year service catch-up is unique to 403(b) plans. If you have at least 15 years with the same qualifying employer (a public school system, hospital, health service agency, church, or home health service agency), you may add up to $3,000 per year, capped at $15,000 over your lifetime.⁵

If you qualify for both the 15-year and age-based catch-ups, the IRS applies contributions to the 15-year limit first, then to the age-based one.⁶

One more scheduling note: starting with the 2027 tax year, SECURE 2.0 will require catch-up contributions to be made as Roth contributions for anyone who earned more than $150,000 in FICA wages from the plan sponsor the previous year.⁷ For 2026, that rule is not yet in force.

Employer Contributions

Many plans add employer money on top of what you defer, either as a match tied to your contributions or as a nonelective contribution paid regardless of what you put in.⁴ Those dollars sit outside your personal $24,500 cap, but they count toward a separate ceiling on total contributions from all sources. For 2026, that combined Section 415(c) limit is $72,000.⁸ Catch-up contributions can push the total higher. Amounts over the applicable limit trigger a 6% excise tax each year they stay in the account.⁹

Traditional or Roth

Many 403(b) plans now offer a Roth option in addition to the traditional pre-tax option. Traditional contributions cut your current tax bill; Roth contributions don’t, but qualified withdrawals in retirement come out entirely tax-free, earnings included.¹⁰

For that tax-free treatment on Roth withdrawals, two conditions have to be met: at least five tax years must have passed since your first Roth contribution to the plan, and you must be at least 59½ (or the distribution has to be due to disability or death).¹⁰ The five-year clock starts on January 1 of the year of your first Roth deferral. Distributions that miss either condition are partially taxable.

The $24,500 deferral limit covers pre-tax and Roth combined. You can split the amount however you like; you just cannot exceed $24,500 in total.

Where the Money Is Invested

Federal rules limit what can hold 403(b) money. The original option, and the source of the “tax-sheltered annuity” name, is an annuity contract issued by an insurance company. These contracts are managed by the insurer and can include options for guaranteed lifetime income payments.¹¹

The second option is a custodial account holding mutual fund shares, with a bank or approved custodian holding the assets for you.¹¹ This is the more common structure today because it opens access to index funds, target-date funds, and actively managed portfolios rather than confining you to insurance products. Some plans also offer a self-directed brokerage window, though plan fiduciaries generally do not monitor investments made through that window the way they do the core lineup.

Getting Money Out Before Retirement

You can generally take distributions from a 403(b) without penalty once you reach age 59½.¹² Withdrawals before that age owe a 10% additional tax on top of regular income tax, unless an exception applies. Common exceptions include separating from service in or after the year you turn 55, total and permanent disability, death (for beneficiaries), a court-ordered QDRO paying a former spouse, unreimbursed medical expenses over 7.5% of your AGI, up to $5,000 per child for a birth or adoption, and a SECURE 2.0 emergency personal expense withdrawal of up to $1,000 once per year.

Plan Loans

If your plan permits loans (not all do), you can borrow against your own balance without triggering taxes. The maximum is the lesser of $50,000 or 50% of your vested balance. Repayment runs through payroll deductions and cannot exceed five years unless the loan is used to buy your primary home.¹³

The risk is default. If you leave your job or stop making payments, the outstanding balance is treated as a taxable distribution. The plan issues a Form 1099-R for the unpaid amount, and you owe income tax on the full balance plus the 10% early distribution penalty if you are under 59½.¹⁴ Most plan loans go wrong for exactly this reason: people borrow expecting to repay easily, change jobs, and get a surprise tax bill.

Hardship Withdrawals

A hardship withdrawal pulls money out for good rather than as a loan, but only when you have an immediate and heavy financial need. The IRS recognizes six safe-harbor reasons: certain medical expenses, home purchase costs for your primary residence, education expenses for the next 12 months, payments to prevent eviction or foreclosure on your primary home, funeral expenses, and certain repairs to your primary residence.¹⁵ The withdrawal is taxed as ordinary income and generally hit with the 10% early distribution penalty if you are under 59½. Plans are not required to offer hardship withdrawals at all.

Rollovers When You Leave the Job

When you separate from your employer, you can roll a 403(b) balance into another employer’s retirement plan or into a traditional IRA. The cleanest path is a direct rollover: your plan administrator sends the funds straight to the new account, nothing is withheld, and no penalty applies.¹⁶

If the plan pays the money to you instead (an indirect rollover), 20% is withheld for federal taxes. You then have 60 days to deposit the full original distribution amount into an IRA or another eligible plan, meaning you need to cover the withheld 20% out of pocket to roll over the complete balance. Anything not rolled over in time is taxed as income and can carry the 10% early distribution penalty.¹⁶ Ask for the direct rollover.

When Withdrawals Become Mandatory

Once you reach age 73, you have to start taking required minimum distributions (RMDs) from your 403(b).¹⁷ Under SECURE 2.0, that age rises to 75 for people born in 1960 or later, a change that will not affect anyone until 2033. Your first RMD is due by April 1 of the year after you turn 73; every RMD after that is due by December 31.

The amount is your prior-year December 31 balance divided by a life expectancy factor from IRS tables. Miss the full RMD and the IRS charges a 25% excise tax on the shortfall, dropping to 10% if you correct the mistake within two years.¹⁸

One useful carve-out: if you are still working past 73, your current employer’s 403(b) may let you delay RMDs from that plan until the year you actually retire. It applies only to the current employer’s plan, not to old 403(b) accounts or IRAs, and not if you own more than 5% of the sponsoring organization.¹⁸

1
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
2
Internal Revenue Service. IRC 403(b) Tax-Sheltered Annuity Plans
3
Internal Revenue Service. Issue Snapshot – 403(b) Plan – The Universal Availability Requirement
4
Internal Revenue Service. Retirement Plans FAQs Regarding 403(b) Tax-Sheltered Annuity Plans
5
Internal Revenue Service. 403(b) Plans – Catch-Up Contributions
6
Internal Revenue Service. 403(b) Plan Fix-It Guide – An Employee Making a 15-Years of Service Catch-Up Contribution Doesnt Have the Required 15 Years of Full-Time Service With the Same Employer
7
Internal Revenue Service. Treasury, IRS Issue Final Regulations on New Roth Catch-Up Rule, Other SECURE 2.0 Act Provisions
8
Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs, as Adjusted for Changes in Cost-of-Living Notice 2025-67
9
Office of the Law Revision Counsel. 26 USC 4973 – Tax on Excess Contributions to Certain Tax-Favored Accounts and Annuities
10
Internal Revenue Service. Retirement Plans FAQs on Designated Roth Accounts
11
eCFR. 26 CFR 1.403(b)-8 – Funding
12
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
13
Internal Revenue Service. Retirement Plans FAQs Regarding Loans
14
Internal Revenue Service. 403(b) Plan Fix-It Guide – You Havent Limited Loan Amounts and Enforced Repayments as Required Under IRC Section 72(p)
15
Internal Revenue Service. Retirement Topics – Hardship Distributions
16
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
17
Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs)
18
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs