Massachusetts Life Producer Practice Exam

Which statement is INCORRECT regarding a tax-sheltered annuity (TSA)?

1. Annual investment gains are excluded from participants' gross income

2. It provides tax-deferred growth

3. It allows flexible contribution amounts

4. Contributions are limited to certain amounts annually

The correct answer is: Annual investment gains are excluded from participants' gross income

The statement that is identified as incorrect suggests that annual investment gains from a tax-sheltered annuity (TSA) are excluded from participants' gross income. However, this representation is misleading because, while the gains inside the TSA are tax-deferred, they are not excluded from gross income. Instead, taxes on investment gains are deferred until the funds are withdrawn, which is when they will be subject to income taxation. This deferment is a critical feature of tax-sheltered annuities, which allows investors to grow their investment without immediate tax implications. In contrast, the other statements correctly describe characteristics of TSAs. They highlight the tax-deferred growth of the investment, meaning that while the money is still in the account, it can grow without being taxed. Additionally, TSAs often allow for flexible contribution amounts, making them accessible to a wider range of participants. There are indeed annual contribution limits set by the IRS to maintain the tax-advantaged status of these accounts, which ensures that while there are generous benefits to participating in a TSA, there are regulatory measures in place regarding contributions.