What penalty is imposed for early withdrawal from a retirement account?

The penalty for early withdrawal from a retirement account, such as a traditional IRA or a 401(k), is generally a 10% additional tax applied to the amount withdrawn, prior to reaching the age of 59½. This penalty is designed as a disincentive to withdraw funds from retirement accounts before they are meant to be accessed, encouraging individuals to save for their retirement.

While early withdrawal does incur this 10% penalty, the amount withdrawn is still subject to regular income tax, which is what makes it crucial for individuals to understand the implications of an early withdrawal. The rationale behind this tax policy is to deter individuals from compromising their long-term savings for immediate needs.

There are certain exceptions to this 10% penalty, such as withdrawals for first-time home purchases or qualified education expenses, but these exceptions do not eliminate the tax obligation. Thus, the correct response indicates the standard penalty that applies in most scenarios of early withdrawal from retirement accounts.