VITA Certification Practice Test 2025 – All-in-One Guide to Master Volunteer Income Tax Assistance!

The correct response highlights that typically, if an individual withdraws funds from a retirement account before reaching the age of 59½, they are subject to a penalty of 10% on the amount withdrawn in addition to the regular income tax owed on that sum. This means that not only does the withdrawn amount count as taxable income for the year, increasing the taxpayer’s overall income tax liability, but there is also a separate penalty specifically designed to discourage early withdrawals from retirement accounts.

This 10% early withdrawal penalty is intended to promote the long-term savings purpose of these accounts. It is a clear financial discouragement aimed at ensuring that individuals consider the long-term implications of early access to their retirement savings. As such, this indicates the seriousness of maintaining funds in retirement accounts until the appropriate age, helping to safeguard financial stability in retirement.

In contrast, the other responses lack the specific context of tax implications associated with early withdrawals. They do not accurately address how penalties function within the tax framework.