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He's young, early 30's, and thinks when goes to take this money out in 30+ years, no one will notice. The gains in the account over the years are minimal, maybe $2,500., which would allow him to "get legit" without too much of a penalty. Anybody have ideas on how he is able to do this without notice and what risks / penalities he may be incurring?

Oh dear, where to begin?

Although we call it a penalty for excess contributions, it's actually an excise tax reported on Form 5329 and usually added to the 1040. However, it's a standalone tax. No 5329, no start of the running of the statute of limitations. IOW, when they get around to it the IRS can go back as far as they like.

When, indeed, might they get around to it? At they moment they're fishing in deeper waters--failure to take Required Minimum Distributions (RMD's) from traditional IRAs. That one's 50% of the RMD, thus more bang for the buck. I would think that when that well runs dry they might move on to excess Roth contributions. The penalty there is 6% of the excess for the year of contribution and, in your friend's case, probably an additional 6% for every year he leaves it there. Earnings have absolutely nothing to do with it, and they already have all the information they need (income from the return and contribution amount from the 5398 filed with them by the custodian).

You can disabuse your colleague of his misunderstanding of how the penalty works with a copy of Pub 590. If he'd like to fix things we can advise you how he goes about doing it. It doesn't sound like he's really interested in doing that since he thinks he'll never get caught. You may be able to entice him by telling him that there could be a way for him to make perfectly legal Roth contributions going forward. No way would I tell him about until until he, as we say in Kansas, gits right with the Lord.

Rule Your Retirement Home Fool
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