I was presented with a "cocktail party" idea that goes as follows: Even though I make too much income to contribute to a Roth IRA, I could still go ahead and set up an account and contribute anyways. Despite the fact that I am technically ineligible to contribute, all that would happen is that I would pay a 10% penalty. But, I could keep the rest of my money in the Roth IRA! Therefore, even though I was not supposed to contribute, 90% of my contribution would still end up in a Roth IRA and grow tax free! Anyone done this or have any comments?
IRS 6% annual penalty,every year, for the amount over the contribution limit- if it is not removed, or applied to a forward year when you can contribute. I believe it's also "technically" illegal to knowingly misuse a tax deferred/free investment vehicle for tax avoidance. The 10% you referred to, is the early withdrawal penalty. I'd love to hear anyone else's take on this on how it washes out when you've got an SEP, a traditional IRA, and a Roth. Suppose you MAX out your Roth, but you've still got an SEP to contribute to......but you can only contibute $1,000 to the SEP( based on income). Yet, typically you can chose between a Traditional IRA and SEP. Hmmmmmm......you can contribute to the SEP, but you can contribute MORE to the Traditional. The problem is you've already maxed out your IRA contribution (because of the roth) IRA's (both kinds) are considered in their TOTAL AGGREGATE contributions. They know this and still want to contribute to a traditional, even though the IRA limit is maxed. The only option is a SEP contribution, correct? Let me know if I'm missing something on the complex example above, I know someone trying to do it, and I'm objecting. PS--leave the tax deduction or lack of, out of the equation for the moment.
Yes, my latest research agrees with your comment. There is a 6% per year penalty, not a one time penalty. Therefore, the idea IMO is not worthwhile.