How are withdrawals from a Tax Sheltered Annuity taxed?

How are withdrawals from a Tax Sheltered Annuity taxed?

• A. They are tax-free.
• B. They are taxed as capital gains only.
• C. They are never taxed.
• D. They are taxed as ordinary income.

Answer: (D)

Withdrawals from a Tax Sheltered Annuity are taxed as ordinary income. Contributions to these plans are typically made with pretax dollars and grow tax-deferred, so when you take money out, the IRS treats the entire distribution (including earnings) as ordinary income in the year of withdrawal. Capital gains tax rates don’t apply to TSA withdrawals. If you withdraw before age 59½, a 10% early withdrawal penalty may apply unless an exception applies.

Withdrawals from a Tax Sheltered Annuity are taxed as ordinary income. Contributions to these plans are typically made with pretax dollars and grow tax-deferred, so when you take money out, the IRS treats the entire distribution (including earnings) as ordinary income in the year of withdrawal. Capital gains tax rates don’t apply to TSA withdrawals. If you withdraw before age 59½, a 10% early withdrawal penalty may apply unless an exception applies.