Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

What is an early withdrawal penalty on IRAs if taken before age 59 1/2?

1. 5%

2. 10%

3. 15%

4. 20%

The correct answer is: 10%

The early withdrawal penalty for Individual Retirement Accounts (IRAs) is established by the Internal Revenue Service (IRS) and is set at 10% for distributions taken before the account holder reaches the age of 59 1/2. This penalty is intended to discourage individuals from withdrawing funds from their retirement accounts prematurely, ensuring that the money remains invested for future retirement needs. This penalty applies to the taxable amount of the distribution, which means if you take money out of your IRA prior to the specified age, you will generally incur a tax of 10% on that amount, in addition to any regular income taxes due on the withdrawal. There are certain exceptions to this rule, such as for first-time home purchases, educational expenses, or certain medical expenses, but in most cases, the 10% penalty is a critical consideration for account holders contemplating early withdrawals.