What can trigger the additional tax on distributions under the Tax Reform Act of 1986?

A distribution before the age of 59 and a half typically incurs an additional tax under the provisions of the Tax Reform Act of 1986 unless specific exceptions apply. This provision is designed to discourage early withdrawal of retirement funds, as these funds are intended primarily for use during retirement.

The rationale behind this additional tax is to promote the long-term savings habit and prevent the depletion of retirement savings before individuals reach retirement age, which could lead to financial instability later in life. Exceptions to this rule can include scenarios such as permanent disability, qualified higher education expenses, or substantial medical bills, among others.

In contrast, withdrawals from employer-sponsored pension plans do not automatically carry the same additional tax penalty; it depends on the circumstances surrounding the withdrawal. Distributions during retirement are generally not subject to this penalty and are instead considered normal withdrawals. Loaning against retirement savings typically does not trigger an additional tax as long as the loan is repaid in accordance with the plan's terms. Thus, option B is the clear choice pointing to the specific age-related penalty outlined in the Tax Reform Act of 1986 for early withdrawals.