Massachusetts Life Producer Practice Exam

Which of these statements about traditional individual retirement accounts is accurate?

1. Withdrawals before age 55 incur a 20% penalty

2. 10% penalty is applied to withdrawals prior to age 59 1/2

3. Contributions are not tax-deductible

4. Account balance is fully taxable upon withdrawal at any age

The correct answer is: 10% penalty is applied to withdrawals prior to age 59 1/2

The statement regarding the 10% penalty applied to withdrawals before age 59 ½ accurately reflects the rules governing traditional individual retirement accounts (IRAs). This penalty serves as a safeguard to encourage individuals to save for retirement and limit the ability to withdraw funds early without incurring a cost. The IRS allows for penalty-free withdrawals under certain circumstances, such as disability, certain medical expenses, or a first-time home purchase, but in general, the 10% penalty is a standard rule for early withdrawals from a traditional IRA. In terms of the other statements, the assertion about a 20% penalty before age 55 is misleading and not aligned with IRS regulations. Traditional IRA contributions are generally tax-deductible depending on income levels and whether the individual is covered by a workplace retirement plan, making the claim of non-deductible contributions inaccurate. Lastly, while account balances in traditional IRAs are taxable upon withdrawal, the timing of those withdrawals in relation to the individual’s age is subject to tax rules, including ordinary income tax, rather than being uniformly taxable at any age. Understanding these specifics and when penalties apply can greatly help in making informed decisions regarding retirement savings.