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My friend has a question.

He wants to know how the IRS will know if he contributes to his Roth, despite being over the income limit...

He and the IRS both get a copy of Form 5498 documenting contributions to his IRA for the prior year. It usually comes in May or early June, since it can't be issued until after the April 15 deadline for contributions, but is required to be sent by June 1.

and if he is caught, he says that he can just take out his contribution without penalty...Is that true?

Not really.

If he withdraws the money by the filing deadline of the year for which the excess contribution was made, he can withdraw the contribution without any taxes or penalties. However, he also has to withdraw any earnings on the contribution. Those earnings are taxed at his marginal rate, plus a 10% penalty if he's under 59 1/2.

If he waits until after the filing deadline to make the withdrawal, he will be assessed a 6% excess contribution penalty.

See IRS Pub 590-A for details.

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