Connecticut Life Producer Practice exam

What is the penalty for withdrawing funds from a Traditional IRA before the age of 59 ½?

1. No penalty if documentation is provided

2. 5% penalty on distribution

3. 10% penalty on distribution

4. 15% penalty on distribution

The correct answer is: 10% penalty on distribution

Withdrawing funds from a Traditional IRA before reaching the age of 59 ½ generally incurs a penalty to discourage early withdrawal and to promote long-term saving for retirement. The correct penalty for such a distribution is a 10% additional tax on the amount withdrawn. This penalty applies unless the withdrawal meets certain exceptions, such as for first-time home purchases or certain medical expenses, which do not apply universally to all early withdrawals. Understanding this regulation is crucial for individuals managing their retirement savings, as it emphasizes the importance of maintaining funds in the account for their intended purpose, which is long-term retirement needs. This penalty structure is designed to encourage individuals to rely on their retirement accounts primarily for retirement income, rather than for other financial needs that could be addressed through other means.