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teachers and other employees receive a special tax advantage.7
The amounts contributed to the annuity are excluded from the
employee’s gross income at the time of the contribution, and
taxation is deferred until such time when the employee receives
payments under the annuity contract. Sec. 403(b)(1). The amount
actually distributed under such contract is taxable to the
distributee in the year in which he or she receives the payments
under the exclusion percentage rule of section 72. Id.
Generally, a tax-sheltered annuity offered by a tax-exempt
organization will lose the section 403(b)(1) tax deferral
advantage unless, under such contract, distributions attributable
to contributions made pursuant to a salary reduction agreement
may be paid only: (1) When the employee: (a) attains age 59-
1/2; (b) separates from service; (c) dies; or (d) becomes
disabled; or (2) in the case of hardship. Sec. 403(b)(11). In
addition, an early distribution satisfying the aforementioned
requirements that is rolled over is not included in income in the
year so distributed if: (1) Any portion of the balance to the
credit of an employee in an annuity contract is paid to him in an
eligible rollover distribution (as defined in section 402(c)(4));
and (2) the employee transfers any portion of such property he
receives in such distribution to an eligible retirement plan (as
7 This includes annuity contracts issued by an insurance
company. Sec. 403(b)(1)(A).
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Last modified: May 25, 2011