Question

24 if a taxpayer withdraws funds from an ira, 401k, or 403b account prior to age \\(59\frac{1}{2}\\), which of the following results?

account holder has to pay additional income tax only.
account holder has to pay both additional income tax and a tax penalty.
account holder has to change employers.
account holder has to pay a tax penalty only.

Explanation:

Analyze early withdrawal rules

Using the Retirement Accounts and Taxation of Withdrawals knowledge points

• Traditional retirement accounts (IRA, 401k, 403b) are funded with pre-tax dollars.
• Withdrawals before age \(59\frac{1}{2}\) are generally considered early distributions.
• These distributions are subject to regular income tax on the withdrawn amount.
• Additionally, a \(10\%\) federal early withdrawal tax penalty is applied.

Evaluate the given options

• Option 1: Incorrect. It ignores the tax penalty.
• Option 2: Correct. Both income tax and a tax penalty apply.
• Option 3: Incorrect. Employment status is unaffected.
• Option 4: Incorrect. It ignores the regular income tax.

Answer:

• Account holder has to pay additional income tax only.
• Account holder has to pay both additional income tax and a tax penalty. (Correct answer)
• Account holder has to change employers.
• Account holder has to pay a tax penalty only.