North Carolina Life Agent Practice Exam 2026 – Comprehensive Test Prep

The penalty tax applied on early withdrawals from a 401(k) plan is 10%. This 10% penalty is imposed by the Internal Revenue Service (IRS) on individuals who take distributions from their 401(k) accounts before reaching the age of 59½, barring certain exceptions such as disability or substantial medical expenses.

This penalty is meant to discourage premature withdrawal of retirement funds, ensuring that individuals save for their retirement and maintain their financial security in later years. Therefore, the 10% penalty serves as a financial deterrent against taking funds out of retirement accounts before individuals are ready to genuinely retire. Understanding this aspect of 401(k) plans is crucial for agents and clients alike as it emphasizes the importance of long-term planning and alleviates the risks associated with early withdrawals.