What is the tax impact of withdrawing from an IRA early?

Withdrawing from an Individual Retirement Account (IRA) before reaching the age of 59½ typically leads to specific financial consequences. When an individual makes an early withdrawal, the funds taken out are generally considered taxable income. This means that the amount withdrawn will be added to the individual's income for the year and taxed at their normal income tax rate.

Additionally, the IRS imposes a 10% early withdrawal penalty on the amount withdrawn unless the individual qualifies for an exception, such as being disabled, having certain medical expenses, or using the funds for a first-time home purchase, among others. This penalty is designed to discourage individuals from taking money out of their retirement savings prematurely, which could jeopardize their long-term financial security.

So, the correct answer aptly captures both the tax implications and the penalty that may apply to early withdrawals from an IRA, emphasizing the dual impact of income taxes and potential penalties that individuals must consider when making such financial decisions.