TSA could save taxes

Is it possible for a teacher who wishes to save money for graduate school set aside up to 20 percent of earnings in a tax-sheltered annuity (TSA)? Later, when the teacher is in graduate school and presumably earning little or no income, she could withdraw cash from the TSA and avoid taxes. - H. A.

Surely, using a TSA might avoid taxes on as much as 20 percent of the teacher's salary, but other costs could turn this alternative into a loser.

First, most opportunities for setting aside cash in a TSA through various plans levy up to 81/2 percent of the funds as a front-end commission. This front-end load can be amortized over a number of years. But for the one year this teacher is considering, itwould be costly. If there were early-withdrawal penalties, these would increase the cost.

Second, earnings from funds in TSA plans vary widely, and the return after taxes should be compared with taxable returns elsewhere. Money market mutual funds, for example, may pay 11-12 percent at different times. Even after paying any taxes during the year income is earned, the bottom-line (after-tax) return should still exceed the TSA return - and the tax liability would have been satisfied.

Anyone considering this should work through the numbers both ways to determine which route promises the most after-tax income.