Final answer:
Withdrawing from a traditional IRA before the age of 59 and a half leads to a 10% penalty tax plus regular income tax, while over-contributing results in a 6% tax on excess amounts per year until corrected. Contribution limits and tax implications can change, so current IRS guidelines should be checked.
Step-by-step explanation:
Penalties for Traditional IRA Withdrawals and Contributions
Withdrawing funds from a traditional IRA before reaching the age of 59 and a half typically results in a 10% penalty tax on the amount withdrawn in addition to the regular income tax that applies. The traditional IRA is designed to provide tax-deferred savings, meaning that taxes on contributions and earnings are paid upon withdrawal, ideally at retirement when one may be in a lower tax bracket. However, there are certain exceptions to this rule, such as using the funds for qualified education expenses or the purchase of a first home, where the penalty may be waived.
Contributing more to an IRA than the allowable limit can also lead to penalties. If an individual contributes more than the maximum amount allowed, which varies per year and by age, they will face a 6% tax for each year the excess contributions remain in the account. It is essential to adhere to the contribution limits to avoid these penalties.
It's worth noting tax laws and contribution limits are subject to change, and it's crucial to consult the current IRS guidelines or a financial advisor for the most accurate and up-to-date information.