What penalty tax applies to premature IRA distributions?

Premature distributions from an Individual Retirement Account (IRA), which are withdrawals made before the account holder reaches the age of 59½, are subject to a penalty tax of 10%. This 10% penalty is designed to discourage individuals from withdrawing funds from their retirement accounts before they reach retirement age, thereby helping to ensure that the funds remain invested for their intended purpose: to provide income during retirement.

It's important to note that while individuals can still access their IRA funds before age 59½, doing so incurs this penalty unless certain exemptions apply, such as for qualified education expenses, first-time home purchase, or certain medical expenses. The penalty serves as an incentive for individuals to preserve their retirement savings until the appropriate age, thus reinforcing the long-term financial planning aspect of IRAs.