Which of the following statements regarding a Tax Sheltered Annuity (TSA) is incorrect?

The assertion that the income from a Tax Sheltered Annuity (TSA) is received income tax-free is incorrect because, while contributions to a TSA are made pre-tax, the distributions—when taken—are generally subject to income tax. This means that although the growth within the account accumulates tax-deferred, once the funds are accessed, they are taxed as ordinary income.

Understanding how a TSA functions is critical. Contributions are made through salary reduction agreements, often set up by employees of eligible non-profit organizations, and are typically tax-deductible. This tax deduction allows for contributions to lower taxable income in the year they are made, providing an immediate tax benefit.

Additionally, while only employees of certain non-profit organizations, including public schools and 501(c)(3) organizations, can offer or participate in a TSA, the tax treatment of distributions is an essential aspect that must be acknowledged: recipients will owe tax on any money withdrawn from the TSA, reflecting common tax treatment for retirement accounts.

This highlights the importance of knowing both the benefits and limitations associated with TSA accounts in regard to taxation, ensuring a complete understanding of their implications for retirement planning.