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URL:  https://boards.fool.com/ltlt-only-the-excess-contribution-is-11367790.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: Over-contributing 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 over-contributing to an IRA is 6% of 
the over-contribution 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 Over-contributing 
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 over-contribute 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
taxable-account investing.

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