Which of the following statements about traditional individual retirement accounts (IRAs) is true?

The correct statement regarding traditional individual retirement accounts (IRAs) is that a 10% penalty is applied to withdrawals before age 59 ½. This is a key feature of traditional IRAs designed to encourage long-term savings for retirement. Generally, if funds are withdrawn prior to reaching the age of 59 ½, the IRS imposes an additional penalty on top of any ordinary income taxes owed on the distributions.

This penalty serves as a deterrent to access retirement funds early, thereby promoting the purpose of IRAs as long-term savings instruments. While there are certain exceptions to this penalty under specific circumstances, such as disability or qualified expenses, the standard rule is that withdrawals before the age threshold incur a penalty.

In the context of the other options, the statement about tax-free withdrawals is misleading because withdrawals from a traditional IRA are subject to taxes and are usually not tax-free unless specific conditions are met. The statement about penalties applied after age 59 ½ contradicts IRS rules, as there are no penalties for taking distributions after that age. Lastly, contributions being tax-deductible only in the first year is also inaccurate; taxpayers may still be eligible for deductions in subsequent years depending on their tax situation and income limits.