Under what circumstance can an IRA withdrawal be made before age 59 1/2 without incurring a 10% penalty tax?

The correct answer is based on specific provisions in the tax code that allow for penalty-free withdrawals from an Individual Retirement Account (IRA) under certain circumstances. In this case, one of those circumstances is to pay for qualified higher education expenses, which includes college tuition for the investor's daughter.

When funds are withdrawn from an IRA to cover qualified education costs, the IRS permits this without imposing the typical 10% early withdrawal penalty, even if the account owner is under the age of 59 1/2. This exception is designed to assist individuals in managing significant education expenses without the additional burden of penalties that would normally apply to early distributions.

The other situations listed, such as purchasing a vacation home, covering funeral costs, or dealing with the permanent and total disability of a spouse, do not fall under the established categories that permit penalty-free withdrawals from an IRA. For instance, while there are exceptions for disability and certain medical expenses, they are subject to more stringent criteria compared to educational expenses. Hence, option B is the only one that aligns directly with IRS guidelines for avoiding the early withdrawal penalty.