Indiana State Life and Health Insurance Practice Exam

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

1. The income from the TSA is received income tax-free

2. The amount contributed is deductible from taxable income

3. The interest earnings are tax deferred

4. A tax-sheltered annuity is available to employees of non-profit organizations

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

In the context of a Tax Sheltered Annuity (TSA), option A is considered incorrect because the income generated from a TSA is not received income tax-free; rather, it is taxable when withdrawn. This means that while the contributions may be made on a pre-tax basis and grow tax-deferred, the distributions taken during retirement or at any other time will be subject to income tax. The other options correctly describe aspects of a TSA. Contributions to a TSA can indeed be deducted from taxable income, allowing individuals to lower their taxable income in the years when they make contributions. Additionally, the interest earnings within a TSA accumulate on a tax-deferred basis until they are withdrawn, meaning that the account holder will not pay taxes on the earnings until they take distributions. Furthermore, a TSA is specifically designed for employees of non-profit organizations, including certain educational institutions and charitable entities, making it accessible to this group.