Question

How are funds contributed to a tax-sheltered annuity treated for taxation?

a) The contributions are taxed as income for the employee, but are tax free upon withdrawal.
b) The contributions are not included as income for the employee, but are taxable upon distribution.
c) The contributions are never taxed.
d) The contributions are taxed as income for the employee.

Answer 1

A tax-sheltered annuity allows employees to make contributions to their retirement accounts on a pre-tax basis. The contributions are not included as income for the employee, but are taxable upon withdrawal.

Step-by-step explanation:

The correct answer is b) The contributions are not included as income for the employee, but are taxable upon distribution.

A tax-sheltered annuity, also known as a 403(b) plan, allows employees of certain tax-exempt organizations to make contributions to their retirement accounts on a pre-tax basis. This means that the contributions are not included as taxable income for the employee in the year they are made.

However, when the employee withdraws funds from the tax-sheltered annuity during retirement, the distributions are subject to ordinary income tax. This is because the contributions were never taxed when they were made, so the withdrawals are treated as taxable income.