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

The statement that income derived from Tax Sheltered Annuities (TSA) is received income-tax free is not accurate. Under the tax treatment of TSAs, although contributions to these annuities can be made with pre-tax income, the income generated within the annuity is generally tax-deferred rather than tax-free. This means that taxes on the earnings are postponed until the funds are withdrawn, at which point they are subject to income tax.

The other statements provide accurate information about TSAs. Employees can indeed contribute pre-tax income, allowing them to lower their current taxable income. Additionally, the tax benefits associated with TSAs do apply until withdrawals are made, meaning that the growth of the investment is tax-deferred during the accumulation phase. When distributions are taken, they are commonly taxed as ordinary income, confirming the tax implications during the withdrawal phase. Understanding these distinctions is crucial for individuals considering TSAs as part of their retirement savings strategy.