A tax sheltered annuity (TSA) is a tax-deferred plan for employees of public schools. This means that contributors can allocate a portion of their gross wages each year to the tax-sheltered fund. TSAs or 403(b) plans are open to employees of tax-exempt organizations such as 1-12 public schools, colleges, universities, libraries, charities and churches.
The money grows in the plan until it is withdrawn, likely at retirement, after 59 1/2 years or after losing a job, and is then taxed as ordinary income at the lower applicable tax rate. Contributions are made into funds or annuities offered by financial institutions chosen by the employer, the majority of them being high-fee insurance products.
The main problem with annuities is that many have stiff penalties for early withdrawals or transfers into other qualified plans. Holding periods for some annuities can be as long as 7-10 years. One way to avoid the surrender charges is to only transfer those amounts which have gone past the penalty date, and as new money passes the threshold, then transfer them to other qualified accounts. Be aware that transfers to other plans usually require a lot of paperwork.
Further, 2009 IRS changes, the first made in 50 years, have restricted the types of plans that transfers can be made to. The other catch is that your existing provider must allow transfers to be made. Check with your employer before making an out-of-plan transfer to a lower fee fund.
However, on the other hand, employees now have access to more transparent information regarding employer created plans. There is also a groundswell among teachers and other educational employees to lobby for better low-fee choices for your retirement money.
If you are changing employers, you can transfer to qualified plans offered by the new employer, on condition that the latter accepts transfers.