Question 14
“Many people worry about penalties when they consider taking money from retirement accounts early. While the default rule penalizes non-qualified early distributions, the tax system recognizes certain life events that may exempt someone from the penalty (though taxes may still apply on pre-tax money). Typical recognized exceptions include severe disability, certain qualified medical expenses, or other narrowly defined circumstances; ordinary personal spending (vacations, consumer purchases) are not exceptions. Because exceptions differ between account types and plans, it’s important to learn the general idea: there are a few well-defined exceptions that can prevent the penalty, but speculative or routine expenses usually do not qualify. The question tests recognition of a common exception scenario.”
Which of these events is most commonly an exception to the typical early-withdrawal penalty?
Did You Also Know...
By Wise Wallet
Dollar-cost averaging reduces timing risk by investing fixed amounts regularly, which smooths out purchase prices over time.