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Here's an idea I've had, which I'd like feedback on:

I'm 25, and recently inherited $50,000. I'm thinking of putting this all into a Roth IRA. I know there's SUPPOSED to be an annual contribution limit of $2000. But if I'm reading the IRS publication right, the penalty for going over that amount is only 2%. So for going $50,000 over the limit, my penalty would only be $1000. I'd willingly pay this now, because then, in 35 years when I retire, all the earnings on the whole $50,000 would be tax free... and that should be a lot more than $1000.

Has anyone tried this before? Does it make sense, or is there something I'm missing?
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... is there something I'm missing?

I think so -- I think the penalty is 6%, not 2%, and it's not a one-time hit as you seem to think, but per calendar year until the excess contributions have been removed.

The best place for a definitive answer is TMF's Tax Strategies board. You can either post your question over there, or (even better, IMHO) browse thru past posts (search for words like "excess contribution") and see what previous posters have been told.

Don't expect a free lunch from the U.S. Congress, or the IRS, on this ticket!

HTH,
Phooley
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From IRS final regulations on Roth IRAs:

"Q-7. Does an excise tax apply if an individual exceeds the aggregate regular contribution limits for Roth IRAs?
A-7. Yes. Section 4973 imposes an annual 6-percent excise tax on aggregate amounts contributed to Roth IRAs that exceed the maximum contribution limits described in A-3 of this section. Any contribution that is distributed, together with net income, from a Roth IRA on or before the tax return due date (plus
extensions) for the taxable year of the contribution is treated as not contributed. Net income described in the previous sentence is includible in gross income for the taxable year in which the contribution is made. Aggregate excess contributions that are not distributed from a Roth IRA on or before the tax return due date (with extensions) for the taxable year of the contributions are reduced as a deemed Roth IRA contribution for each subsequent taxable year to the extent that the Roth IRA owner does not actually make regular IRA contributions for such years. Section 4973 applies separately to an individual's Roth IRAs and other types of IRAs."

WTR
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<< Does it make sense, or is there something I'm missing?>>

No, and Yes! Trying to pull one over the IRS is NEVER a good idea, for one! For another, one's contributions to ANY kind of IRA MUST come from "earned" income, not inhereted income.
Good luck,
Eddie
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