Tennessee Insurance Practice Exam

Premature IRA distributions are assessed a penalty tax of?

1. 5%

2. 10%

3. 15%

4. 25%

The correct answer is: 10%

Premature IRA distributions are generally subject to a penalty tax of 10%. This penalty is imposed by the IRS on individuals who withdraw funds from their Individual Retirement Accounts (IRAs) before reaching the age of 59½, unless certain exceptions apply, such as disability, medical expenses, or buying a first home. This penalty serves as a deterrent to encourage individuals to keep their retirement savings intact until they reach retirement age. The purpose of the IRA is to provide a means for individuals to save for their retirement over the long term, therefore withdrawing funds prematurely undermines this goal. As a result, the 10% penalty tax applies to the amount withdrawn that exceeds any allowable exceptions. In the context of the other options, lower percentages such as 5% do not align with IRS regulations for premature distributions, and higher penalties like 15% or 25% also do not represent the standard assessment for these early withdrawals. Thus, the 10% penalty is the correct and established figure within current tax laws regarding premature IRA distributions.