West Virginia State Life Insurance Practice Exam

What is the penalty tax percentage for premature IRA distributions?

1. 5%

2. 10%

3. 15%

4. 20%

The correct answer is: 10%

The penalty tax percentage for premature IRA distributions is 10%. This means that if an individual withdraws money from their Individual Retirement Account (IRA) before reaching the age of 59½, they are typically subject to a 10% additional tax on the amount withdrawn, in addition to any regular income tax that may apply to the distribution. This penalty is in place to discourage individuals from accessing their retirement savings early, promoting the long-term growth and intended use of these funds for retirement. There are some exceptions to this rule, such as certain medical expenses, disability, or first-time home purchases, but the 10% penalty generally applies to most early withdrawals. Understanding this penalty is crucial for individuals managing their retirement accounts, as it can significantly impact the overall amount of money available during retirement if premature withdrawals are made.