Here's a good practice question for you:
Which of the following represent tax-free withdrawals from a Traditional IRA?
I. withdrawals pursuant to a first-time purchase of a primary residence
II. withdrawals pursuant to permanent disability
III. withdrawals before age 59 1/2
A. I, II
B. I, II, III
D. none of the choices listed
This question is designed to look easy--most people in the business know that withdrawals used toward a purchase of a first home or because of disability are not subject to the 10% penalty, and, therefore, they start heading down that dead-end. The question asked which withdrawals from a Traditional IRA are not taxable. The answer? None of the choices listed.
Withdrawals from a Traditional IRA are taxable. Some withdrawals result in a 10% penalty tax, some do not, but you can't answer the question you thought you were being asked; you have to make sure you see what the angle is. Read practice questions carefully and try to spot any possible tricks before proceeding.