Certified Plan Sponsor Professional (CPSP) Practice Exam

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What is the early withdrawal penalty for 401(k) distributions taken before age 59½?

The correct answer is: 10%

The early withdrawal penalty for 401(k) distributions taken before age 59½ is 10%. This penalty is imposed by the Internal Revenue Service (IRS) to discourage individuals from withdrawing funds from their retirement accounts prematurely. The purpose of a 401(k) is to provide individuals with a means to save for retirement, and early withdrawals can undermine this goal. In addition to the 10% penalty, individuals who take early distributions may also be subject to ordinary income tax on the amount withdrawn. This can significantly increase the overall tax liability associated with early withdrawals. The penalty is designed to encourage individuals to keep money in their retirement accounts until they reach retirement age, thus fostering long-term saving and financial stability during retirement years.