What is the penalty tax for excess contributions to an IRA?

The penalty tax for excess contributions to an Individual Retirement Account (IRA) is set at 6%. This penalty applies to the amount of the excess contribution that has not been withdrawn before the tax filing deadline for that year, typically April 15 of the following year. If taxpayers do not correct these excess contributions, they incur a 6% excise tax on the excess amount for each year it remains in the account.

Understanding this penalty is crucial as it emphasizes the importance of adhering to contribution limits established by the IRS to avoid unnecessary tax liabilities. In contrast, other potential options like 10% or 5% do not accurately reflect the IRS regulations concerning excess IRA contributions. The absence of a penalty indicates situations such as compliant contributions made within the allowable limits or corrective withdrawals done in a timely manner.