Question

A state or local government would choose to establish a Section 457 plan for all the following reasons except:

A) Providing a retirement savings option for employees.
B) Attracting and retaining qualified employees.
C) Offering tax-deferred contributions for employees.
D) Distributing tax-free withdrawals to employees

Answer 1

A state or local government would not establish a Section 457 plan to distribute tax-free withdrawals to employees, as these withdrawals are actually taxed as ordinary income upon distribution.

Step-by-step explanation:

The reason a state or local government would not establish a Section 457 plan is D) Distributing tax-free withdrawals to employees. While these plans do offer a retirement savings option for employees (A), help in attracting and retaining qualified employees (B), and allow for offering tax-deferred contributions (C), they do not distribute tax-free withdrawals. Instead, taxes on withdrawals from a Section 457 plan are deferred until the money is taken out during retirement, at which point the withdrawals are taxed as ordinary income. This is similar to other defined contribution plans, like 401(k)s and 403(b)s, where employees and employers contribute to the retirement account, which can then be invested in a variety of vehicles, and taxes are deferred until retirement.