Legal Definitions - tax-sheltered annuity

A tax-sheltered annuity is a type of retirement plan for employees of public educational systems and certain tax-exempt organizations. It is also known as a 403(b) plan. This plan allows employees to make pretax contributions to their retirement account, which reduces their taxable income. Employers may also contribute to the plan. The money in the account grows tax-free until it is withdrawn at retirement.

For example, a teacher who works for a public school may have a tax-sheltered annuity as part of their employee benefits. They can choose to contribute a portion of their salary to the plan, which will reduce their taxable income. The money in the account will grow tax-free until they retire and start withdrawing the funds.