Certified Financial Consultant (CFC) Practice Exam

What is the penalty for making excessive contributions to an IRA?

1. 5%

2. 6%

3. 10%

4. 15%

The correct answer is: 6%

When contributions to an Individual Retirement Account (IRA) exceed the allowed annual limit, the IRS imposes a penalty on the excess contributions. This penalty is specifically set at 6%. The rationale behind this penalty is to encourage individuals to adhere to the contribution limits established by tax laws, ensuring that retirement accounts are used primarily for the purpose of saving for retirement and not as a means of avoiding taxes through excess contributions. The 6% penalty applies to each year the excess contribution remains in the account. It is important for individuals to monitor their contributions closely, as exceeding the limit not only incurs this penalty but may also lead to tax complications. Additionally, it is possible to rectify excessive contributions by withdrawing the excess amount and any earnings on it before the tax-filing deadline, which can help mitigate the penalty. Understanding these guidelines is crucial for effective retirement planning and compliance with IRS regulations.