Tennessee Insurance Practice Exam

Which statement about traditional individual retirement accounts is true?

1. Withdrawals before age 60 incur a 20% penalty

2. IRAs cannot be inherited

3. Only high earners can contribute

4. A 10% penalty is applied to withdrawals before age 59 1/2

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

The accurate statement regarding traditional individual retirement accounts (IRAs) is that a 10% penalty is applied to withdrawals made before age 59 1/2. This penalty is designed to discourage early withdrawals, allowing investors to grow their retirement savings without tapping into them prematurely. It is essential to note that while individuals may make withdrawals from their IRAs before this age, doing so typically incurs this penalty unless exceptions apply, such as for certain educational expenses, first-time home purchases, or substantial medical expenses. This framework encourages individuals to adhere to the intended purpose of retirement accounts. The other statements do not reflect the characteristics of traditional IRAs. Traditional IRAs can be inherited, which is vital for estate planning. Additionally, contribution eligibility is not solely based on high earnings; there are guidelines allowing a broad range of income earners to contribute, subject to maximum contribution limits set annually.