What is the tax penalty rate imposed by the IRS for excess contributions to an IRA?

The correct answer is 6%. The IRS imposes a tax penalty of 6% on excess contributions made to an Individual Retirement Account (IRA). Excess contributions occur when an individual contributes more than the allowable limit to their IRA for a given tax year. This 6% penalty is applied to the excess amount for each year it remains in the IRA.

Understanding this penalty is important for account holders, as it encourages compliance with the contribution limits set by the IRS, thereby helping individuals make the most of their retirement savings without incurring additional costs. Individuals can avoid this penalty by either withdrawing the excess contributions before the tax filing deadline or by applying the excess to subsequent years if eligible conditions are met.