Which of the following statements regarding tax benefits of qualified retirement plans is NOT true?

The statement regarding tax benefits of qualified retirement plans that is not true is that employees pay taxes only on the interest earned upon distribution, not on contributions. In reality, employees are typically taxed on both the contributions made on their behalf (which may be tax-deferred until withdrawal) and the interest or earnings accrued within the plan.

When employees participate in a qualified retirement plan, their contributions are often made pre-tax, meaning that they do not pay income tax on those contributions at the time they are made. However, when distributions are taken from the plan—whether these are withdrawals of the contributions, the earnings on those contributions, or a combination of both—employees are required to pay income taxes on the total amount taken out, not just the interest earned. This includes both the original contributions and any investment growth that has occurred over the life of the plan. The tax advantage of qualified retirement plans lies in the deferral of tax liability until the funds are distributed, which can result in a lower tax rate for individuals in retirement compared to their working years.

This understanding highlights the nuances of how qualified retirement plans work and emphasizes the tax implications at the time of distribution rather than at the point of contribution.