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It doesn't work that way. An excess contribution remains an excess contribution in full until it's withdrawn. IOW, you can't call $2,000 of a 1999 excess distribution your 2000 contribution. In the example you gave, you would pay a 6% annual penalty on the full $10,000 until you removed it.

Yes, but if you continue to contribute $2K each year, it effectively drops the percentage of the total assets that are an "excess contribution". Maybe not in the same proportion as I originally posted. In any case, when you have a very small amount in the IRA and you add a very, very large amount as "excess", it makes almost no difference.

But, Phil, I must ask, does the rest of what I said make sense?

Could you do this and not have the IRS take a severely dim view of it?

It might make sense for certain individuals.

And, do I have the rest right? If I can earn 15% annually on that money, and I'm paying 6% annually in the form of tax, do I get the rest tax free? If I earn more than 15% on the assets, and I'm in the highest tax bracket, this would easily work to my advantage. It would allow one to shelter short term gains and not pay as much tax as one would pay if they were in a taxable account.

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