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Subject:  IRA Over-Contribution Penalty? Date:  10/15/1999  12:50 PM
Author:  Abhyasi Number:  19656 of 133005

A question about the IRS voiding an IRA:

I've just had an elightening discussion about over-contributing to an IRA with TMFPixy ('Maximum IRA Contribution for 2?' thread on the 'Retirement Investing' Board, first post#14445). In a nutshell, there's a 6% penalty for every dollar contributed over the max (i.e. 2K), every year. So a $3,000 contribution in one year gets hit with a 60$/yr penalty.

However, the earnings aren't penalized, which means that a penalized over-contribution could still be more profitable than investing in a taxable account, given a high enough capital gain tax rate, and a high enough return on the investment. For example, after 8 years, a 20% return will make more money being penalized in an IRA than it will being hit with a 20% long-term capital gain in a taxable account (the amount invested here is not relevant). It would also be 40% larger after 20 years, and 100% larger after 30 years. That's a very large factor to consider in long-term retirement investing.

TMFPixy wondered if the experts here would know if the IRS would let someone get away with this, and if a broker would even allow this to happen. Even if I dilligently paid my penalties, would I just be screaming for an audit and a revocation of my IRA? Your advice is appreciated.
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