Skip to main content
No. of Recommendations: 0
Can the 2K max annual IRA contribution for a working individual be combined with the 2K max annual IRA contribution of another individual (e.g. my wife) in the same account? I'd like to keep trading costs down by not having to trade from 2 accounts.

Thanks for the advice, and thanks as always for the great reading here.

-Abhyasi
Print the post Back To Top
No. of Recommendations: 0
As Pixy & others will no doubt respond:

The "I" in "IRA" stands for "individual"; no joint accounts are allowed.
Print the post Back To Top
No. of Recommendations: 0
Yes and no. No they cannot be combined in the same account. But for example, some brokers will allow you to apportion the commission and the shares from a single large purchase among several accounts at the same firm--some of which could be IRA and/or spousal accounts. In short, it can be negotiable with some firms.
Print the post Back To Top
No. of Recommendations: 0
Thank you both for the helpful replies.

Another max contribution detail I've yet to discover is: what's the penalty for contributing over the max 2K per year? Will it simply be rejected by your broker? Does it invalidate the entire IRA, or is the amount over 2K simply taxed differently?

I'm trying to determine if a signifigant investment return could offset an over-contribution penalty. Thanks yet again.
Print the post Back To Top
No. of Recommendations: 0
Abhyasi writes:

<<Another max contribution detail I've yet to discover is: what's the penalty for contributing over the max 2K per year? Will it simply be rejected by your broker? Does it invalidate the entire IRA, or is the amount over 2K simply taxed differently?>>

The excess contribution is penalized at 6% per year in each and every year it remains in the account. Many brokers won't allow the excess contribution, but many don't care. If you have one of the latter, it's conceivable you could leave the money in there at 10%, pay your 6%, and net 4% within the account. Remove it, though, and the same money would net you even more after taxes earning the same 10%.

Regards..Pixy
Print the post Back To Top
No. of Recommendations: 0
<<Another max contribution detail I've yet to discover is: what's the penalty for contributing over the max 2K per year? Will it simply be rejected by
your broker? Does it invalidate the entire IRA, or is the amount over 2K simply taxed differently?>>

The excess contribution is penalized at 6% per year in each and every year it remains in the account. Many brokers won't allow the excess contribution, but many
don't care. If you have one of the latter, it's conceivable you could leave the money in there at 10%, pay your 6%, and net 4% within the account. Remove it,
though, and the same money would net you even more after taxes earning the same 10%


Thanks for the reply. I must admit I'm missing something here. If the penalty is only 6% per year, how could the same money net me even more after taxes, when my capital gain tax (long-term, lets say) would be 10% or 20%, depending on my tax bracket?

Also, I assume that both the excess contribution itself and the return it generates are penalized (E.g., the returns of an excess 10K growing for 10 years would also get taxed 6% every single year)?

Thanks again!
Print the post Back To Top
No. of Recommendations: 1
Abhyasi writes:

<<I must admit I'm missing something here. If the penalty is only 6% per year, how could the same money net me even more after taxes, when my capital gain tax (long-term, lets say) would be 10% or 20%, depending on my tax bracket?>>

Assume you made an excess contribution of $1,000. It earns 10%, or $100. You must pay a penalty of 6% on the excess contibution of $60. Thus, you net $40 for the year. In a taxable account, that $1K still earns 105, or $100. You pay taxes of 20%, or $20. You net $80. Which is larger, the $40 or the $80?

<<Also, I assume that both the excess contribution itself and the return it generates are penalized (E.g., the returns of an excess 10K growing for 10 years would also get taxed 6% every single year)?>>

Surprisingly, no. 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
Print the post Back To Top
No. of Recommendations: 1
<< 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.
Print the post Back To Top
No. of Recommendations: 0
Abhyasi asks:

<<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>>


I'll look over your spreadsheet in the next few days and get back to you.

Regards..Pixy
Print the post Back To Top
No. of Recommendations: 0
Abhasi wrote:

<<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.>>


While it makes an interesting exercise, I discovered a flaw in your spreadsheet and am returning it in a separate message. If you use a 10% return and a capital gains rate of 20%, you can't catch the taxable account with an overcontribution. With a 15% return, it takes 18 years. The higher the return, the shorter time it takes.

What's really of interest is whether the custodian would allow the overcontribution and how long it would take before the IRS said enough's enough and voided the IRA. I can't answer that question, but maybe the goo-roos on the Tax Strategies board can.

It was a great mental exercise, though. :-)

Regards..Pixy
Print the post Back To Top
No. of Recommendations: 0
What's really of interest is whether the custodian would allow the overcontribution and how long it would take before the IRS said enough's enough and voided the
IRA. I can't answer that question, but maybe the goo-roos on the Tax Strategies board can.

It was a great mental exercise, though. :-)


For those interested, I've continued this thread by posting the above questions on the Tax Strategies board at http://boards.fool.com/message.asp?id=1040014006040000&post=true .

Thanks for the help, Pixy!
Print the post Back To Top
No. of Recommendations: 0
TMFPixy writes (in part):

What's really of interest is whether the custodian would allow the overcontribution and how long it would take before the IRS said enough's enough and voided the IRA.

I reply:

The easiest work-around for any potential problems with the custodian would be to open IRAs with different custodians and contrbute $2000 to each. The real problem is with the IRS. I imagine we'd be talking back taxes, penalties, and interest, but that's just a guess on my part. --Bob
Print the post Back To Top