Penney has ended a frustrating spell at Hillsborough by linking up with the East Anglians following his recent release by Wednesday and has become the club's sixth signing of the close season alongside Wes Burns, Lee Evans, Rekeem Harper, Macauley Bonne and Vaclav Hladky.
Penney, linked earlier this summer to QPR, said: "After meeting the manager (Paul Cook), I knew that this was the right place to kick on with my career.
“The club is definitely going in the right direction and I want to be part of that.
“My main aim is to help Ipswich get back to the Championship and I will give it my absolute best to try and make that happen.”
Penney was among ten players released by the Owls at the end of last season.
Handed his Owls bow in a League Cup tie at Sunderland in August 2018, the left-back, who can also operate in midfield, was handed opportunities under former head coach Jos Luhukay, only to later fall out of favour following the Dutchman's departure.
Penney subsequently joined Hamburg outfit St Pauli, coached by Luhukay for a season-long loan in August, 2019 and struggled for first-team opportunities at Wednesday last term.
The Chesterfield-born player made 10 league starts and five substitute appearances for the club in 2020-21.