Massachusetts Life Producer Practice Exam

What penalty tax is imposed on premature IRA distributions?

1. 5%

2. 10%

3. 15%

4. 20%

The correct answer is: 10%

The penalty tax imposed on premature distributions from an Individual Retirement Account (IRA) is 10%. This means that if an individual withdraws funds from their IRA before reaching the age of 59½, they typically face a tax penalty of 10% on the amount withdrawn. This penalty is intended to discourage early access to retirement funds and encourage individuals to keep their money invested for their retirement years. It's important to note that there are exceptions to this rule. Certain circumstances, such as first-time home purchases, education expenses, or medical expenses, might allow for penalty-free withdrawals. However, for most cases, the standard penalty remains at 10%, emphasizing the importance of understanding the long-term nature of retirement savings and the potential costs associated with accessing these funds prematurely.