Texas Life Agent Practice Exam

What is the age threshold for incurring a premature distribution penalty on Traditional IRAs?

1. 55

2. 59 1/2

3. 62

4. 65

The correct answer is: 59 1/2

The age threshold for incurring a premature distribution penalty on Traditional IRAs is 59 1/2. This rule is established by the Internal Revenue Service (IRS) to discourage early withdrawals from retirement accounts. If an individual takes a distribution from their Traditional IRA before reaching this age, they may be subject to an additional 10% tax penalty on the amount distributed, on top of any ordinary income tax due on the withdrawal. There are specific exceptions to this rule, such as for certain hardships or medical expenses, but in general, reaching the age of 59 1/2 allows individuals to withdraw funds from their IRA without incurring this penalty. This age threshold is important for planning retirement funds and understanding the long-term nature of retirement savings.