What is the penalty for excessive contributions to an IRA?

The penalty for excessive contributions to an Individual Retirement Account (IRA) is indeed 6%. This penalty is applied to the amount of the excess contribution that exceeds the allowable limit for the year. The IRS imposes this penalty to discourage individuals from exceeding the contribution limits, which are set to promote fair use of tax-advantaged retirement accounts.

When someone contributes more than the allowable limit to their IRA, they are subject to a 6% tax on the excess amount for each year that the excess remains in the account. This means that if the excess contribution is not corrected by either withdrawing it or applying it to the next year’s contribution limit, the penalty continues to accumulate, resulting in ongoing financial repercussions for the account holder. By imposing this penalty, the IRS ensures that individuals adhere to the contribution limits, thereby maintaining the integrity of the tax advantages provided by IRAs.