What is the penalty for an early withdrawal from a retirement plan before age 59 1/2?

The correct choice highlights that there is a significant financial consequence for individuals who withdraw funds from their retirement plans, such as 401(k)s or IRAs, before reaching the age of 59 1/2. Specifically, a 10% penalty is imposed on the amount withdrawn early, which serves as a deterrent to prevent individuals from accessing their retirement savings prematurely. This penalty is in addition to the normal income taxes that would be due on any taxable growth within the account.

The reason for this penalty is rooted in the purpose of retirement accounts, which are designed to encourage long-term savings for retirement. When individuals take money out too early, they may compromise their future financial stability, and the penalty serves to maintain the integrity of these retirement savings vehicles.

Moreover, the additional taxes levied on the growth aspect of the accrued funds ensure that individuals fully account for the tax implications when making withdrawals, thus reinforcing the importance of using retirement funds solely for retirement purposes.