What is the penalty for excessive contributions to a traditional IRA?

When an individual contributes more to a traditional IRA (Individual Retirement Account) than the allowed annual contribution limit, the penalty for that excessive contribution is a 6% excise tax on the excess amount for each year it remains in the IRA. This means that if an individual does not withdraw the excess contributions, they will incur this penalty annually until the excess is corrected.

For example, if a person contributes $7,000 to their IRA in a year when the limit is $6,000, the excess contribution is $1,000. If this amount is not corrected (by either withdrawing the excess or applying it to a future year’s contribution limit), the individual would owe a 6% penalty on the $1,000 for that tax year and each subsequent year until the excess is addressed.

This penalty serves as an incentive for individuals to adhere to the contribution limits set by the IRS, promoting disciplined retirement savings behavior.