Which of the following distributions is subject to the 10% penalty for early withdrawal?

The correct answer relates to the specific conditions under which a distribution can be taken from retirement accounts without incurring an early withdrawal penalty. An in-service hardship withdrawal typically occurs when an individual needs to access their retirement savings before reaching the age of 59½. Generally, withdrawals from plans like a 401(k) before this age are subject to a 10% penalty unless certain exceptions apply.

In the case of an in-service hardship withdrawal at age 55, unless the withdrawal meets specific criteria outlined by the IRS as exceptions to the penalty, it would indeed incur the 10% penalty for early withdrawal.

On the other hand, distributions made after reaching the age of 59½, such as those from a traditional IRA, do not incur the penalty because they fall under the normal distribution rules. Similarly, loans from a Section 401(k) plan are not categorized as withdrawals, thus they are not subject to the penalty. Lastly, contributions made under a Section 457 plan are treated more favorably for early withdrawals; they generally do not incur the early withdrawal penalty when accessed, even before retirement age.

Understanding these nuances about age, type of withdrawal, and plan specifics is essential for anyone managing their retirement savings.