The Motley Fool Discussion Boards

Previous Page  
Investing/Strategies / Retirement Investing 

URL:
https://boards.fool.com/ltltonlytheexcesscontributionis11367790.aspx


Subject: Re: Maximum IRA Contribution for 2?  Date: 10/13/1999 1:05 PM  
Author: Abhyasi  Number: 14494 of 103842  
<< Only the excess contribution is penalized each year, not the earnings. Your obvious next question is, "At what point will the untaxed earnings in a Roth IRA exceed the earnings on the taxable account?" I dunno. Construct a spreadsheet, tell me your answer, and I'll verify it's correct. :) Regards..Pixy >> Spreadsheet constructed! Summary: Overcontributing to an IRA is more profitable than investing in a taxable account, if the money is invested from 1 to 20 years, the exact period depending on your capital gain tax rate and the investment's rate of return. Details: The penalty for overcontributing to an IRA is 6% of the overcontribution amount only, and does not penalize earnings on that amount. Therefore, an investment rate of return of more than 6% should eventually offset this penalty, due to the effects of compounded earnings. The larger the rate of return on the investment, and the larger the capital gain tax that would be incurred in a taxable account, the shorter the time it takes for the IRA account balance to exceed what the taxable account balance would have been. The summarized results below are quite interesting: Investing Years Needed to Make IRA Overcontributing more Profitable than a Taxable Account: Capital Gains Tax 10% 15% 20% 28% 36% 10% 20 16 13 10 7 15% 12 9 7 4 3 Invest 20% 8 5 4 2 1 ment 25% 6 4 3 1 1 Rate of 30% 4 3 2 1 1 Return 35% 3 2 1 1 1 40% 3 2 1 1 1 45% 2 1 1 1 1 50% 2 1 1 1 1 55% 2 1 1 1 1 60% 1 1 1 1 1 So if you're investing Foolishly for 5 years or more in the Foolish4 (20% return, let's say), it makes more sense to overcontribute to your IRA instead of putting it in a taxable account. The difference is even more dramatic if you're Foolishly investing in one of the Workshop Strategies (40%+), or if you're in it for the really long haul (20 years). What do you think, Pixy? Am I missing any subtle tax nuances? (I've sent the spreadsheet to you seperately). This could be the end of my taxableaccount investing. 

Copyright 19962021 trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us 