Series 7 practice questionmediumRetirement Accounts — Early Withdrawal Penalty
A 45-year-old client withdraws $20,000 from her Traditional IRA to pay for a vacation. What are the tax consequences?
- AThe $20,000 is subject to ordinary income tax plus a 10% early withdrawal penalty✓ Correct answer
- BNo taxes or penalties since IRA withdrawals are always tax-free
- CThe $20,000 is subject to capital gains tax only
- DThe $20,000 is subject to a 5% early withdrawal penalty only
Explanation
Why A — The $20,000 is subject to ordinary income tax plus a 10% early withdrawal penalty
Withdrawals from a Traditional IRA before age 59 1/2 are subject to ordinary income tax on the full amount withdrawn, plus an additional 10% early withdrawal penalty. Certain exceptions to the penalty exist (such as first-time home purchase up to $10,000, qualified education expenses, and disability), but a vacation does not qualify for any exception.
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