Question 60

A withdrawal from a qualified plan will incur a 10% tax penalty if it is made before the insured reaches age 59 1/2.

Withdrawals from qualified plans, such as 401(k)s or IRAs, generally incur a 10% tax penalty if taken before the age of 59 1/2. This rule is designed to discourage early access to retirement funds.

A) before the insured reaches age 59 1/2

This option is correct because the Internal Revenue Service (IRS) imposes a 10% early withdrawal penalty on distributions taken from qualified retirement plans before the account holder reaches age 59 1/2. This penalty encourages individuals to save for retirement rather than accessing funds prematurely.

B) due to a disability of the participant

This option is incorrect as withdrawals made due to a disability of the participant qualify for an exception to the 10% penalty. If an individual becomes disabled, they are allowed to withdraw funds from their retirement account without incurring the early withdrawal penalty.

C) for the purchase of a first home

This option is also incorrect. While first-time homebuyers can withdraw up to $10,000 from an IRA without penalty for a home purchase, this exception does not apply to all qualified plans. Therefore, this option does not meet the conditions for incurring a penalty.

D) to a former spouse as a result of a divorce decree

This option is incorrect because transfers of retirement assets due to a divorce (often through a Qualified Domestic Relations Order, or QDRO) do not incur the 10% penalty. These transfers are recognized as exceptions under tax law.

Conclusion

The correct answer is A, as it directly reflects the IRS's stipulation regarding early withdrawals from qualified plans. Options B, C, and D each provide scenarios where exceptions to the penalty apply, highlighting that not all withdrawals before age 59 1/2 incur the 10% tax penalty. Understanding these nuances is essential for effective retirement planning and compliance with tax regulations.