Final answer:
The incorrect statement about Tax Sheltered Annuities is that withdrawals are tax-free; withdrawals from TSAs are instead subject to income tax.
Step-by-step explanation:
The statements about a Tax Sheltered Annuity (TSA) generally hold true, with one exception – the claim that withdrawals are tax-free. A Tax Sheltered Annuity is indeed a retirement savings plan that allows participants to contribute pre-tax dollars, and the earnings on these contributions grow tax-deferred. This means that taxes on the accumulated earnings are deferred until the participant decides to make withdrawals, typically during retirement.
However, the key distinction lies in the taxation of withdrawals. Contrary to the claim, withdrawals from a TSA are not tax-free. When participants take funds out of their TSA, they become subject to income tax on the withdrawn amount. This taxation upon withdrawal is a fundamental characteristic of traditional retirement savings plans like TSAs.
In contrast, Roth IRAs operate differently. Contributions to Roth IRAs are made with after-tax dollars, and while the earnings grow tax-free, qualified withdrawals during retirement are generally tax-free. This stands in contrast to the tax-deferred growth and taxable withdrawals characteristic of TSAs.
It's essential for individuals to understand the tax implications associated with different retirement savings plans. While TSAs and other traditional plans offer the benefit of tax-deferred growth, withdrawals are taxed as income. The choice between a TSA and other retirement plans depends on an individual's financial circumstances, tax goals, and retirement planning strategy.