What penalty is incurred for withdrawing funds from a traditional IRA before the age of 59 ½?

Withdrawing funds from a traditional IRA before reaching the age of 59 ½ typically incurs a 10% penalty on the amount withdrawn. This rule is designed to encourage individuals to save for retirement and discourage early access to these funds, ensuring that the money remains within the tax-deferred account until retirement.

The 10% penalty applies to the taxable portion of the distribution and is in addition to any regular income tax owed on the withdrawal amount. There are specific exceptions to this penalty, such as for first-time home purchases, certain education expenses, or major medical expenses, but generally, premature withdrawals are subject to this penalty.

Understanding this penalty is important for anyone considering withdrawing from their retirement savings early, as it can significantly affect the overall amount they receive. In contrast, other penalties mentioned in the incorrect options do not align with IRS regulations governing early distributions from traditional IRAs.