AD Banker Comprehensive Practice Exam

Under which circumstance can a qualified plan pre-mature withdrawal tax penalty not be waived?

1. Disability

2. Buying a first vacation home

3. Qualified educational expenses

4. Death

The correct answer is: Buying a first vacation home

A qualified plan, such as a 401(k) or an IRA, typically allows for early withdrawals, but these withdrawals are often subject to a tax penalty unless certain conditions are met. The correct answer indicates a scenario where the penalty cannot be waived, distinguishing it from other circumstances that do provide exceptions. In the case of buying a first home, specifically for purchasing a vacation home, this does not qualify for penalty exemption. The IRS provides specific provisions regarding first-time home purchases, but these generally apply to primary residences, not second homes or vacation properties. Therefore, withdrawals made for the purpose of acquiring a vacation home do not meet the criteria for penalty waivers, which is why this option stands out as correct. In contrast, other situations, such as disability, qualified educational expenses, and death, are among the common exceptions recognized by the IRS. For instance, if an account holder becomes disabled, they can withdraw from their retirement account without incurring the premature tax penalty. Similarly, withdrawals for certain educational expenses or in the event of the account holder's death also allow for penalty-free distributions.