Tennessee Insurance Practice Exam

Which statement about a Tax Sheltered Annuity (TSA) is false?

1. Income derived from the TSA is subject to income tax

2. Contributions can be made on a pre-tax basis

3. Distributions from the TSA are typically taxed

4. Income derived from the TSA is received income tax-free

The correct answer is: Income derived from the TSA is received income tax-free

In the context of a Tax Sheltered Annuity (TSA), the statement that income derived from the TSA is received income tax-free is incorrect. Income generated within a TSA, such as interest, dividends, or capital gains, is tax-deferred while it remains in the account, meaning that taxes on this income are postponed until distribution. However, once distributions are taken from the TSA, those amounts are typically subject to income tax. This aligns with the purpose of a TSA, which is to provide a means of saving for retirement with tax advantages. Contributions to a TSA can indeed be made on a pre-tax basis, allowing individuals to reduce their taxable income in the years they make contributions. Distributions from the TSA, when withdrawn during retirement or at other qualifying times, are processed as taxable income. Hence, the belief that income can be received tax-free is a misunderstanding of how TSAs function concerning taxation. Understanding these tax implications is crucial for individuals who are planning their financial futures and utilizing TSAs as part of their retirement strategy.