Intuit Academy Tax Practice Exam 2025 - Free Tax Practice Questions and Study Guide

When funds are withdrawn from a retirement account before reaching the age of 59½, the standard consequence is a 10% early withdrawal penalty in addition to any applicable income tax on the amount withdrawn. This penalty is designed to discourage account holders from accessing their retirement savings prematurely, ensuring these funds are preserved for their intended use during retirement.

Moreover, the early withdrawal tax applies regardless of the type of retirement account, including traditional IRAs and 401(k) plans. While there are certain exceptions that may allow for penalty-free withdrawals under specific circumstances, such as disability, medical expenses, or first-time home purchase, these scenarios do not alter the general rule that a 10% penalty applies to most early distributions.

Thus, the correct response highlights the combination of the penalty tax along with the necessity to report the withdrawn amount as income, which would also be subject to income tax, reinforcing the potential tax implications of an early withdrawal from retirement accounts.