Author Topic: Over stuffing an IRA  (Read 777 times)

zoro

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Over stuffing an IRA
« on: September 18, 2018, 02:00:28 PM »
has anyone had any experience in over contributing to an IRA?  There is a 6% excise penalty, but I have a special situation where i can invest a significant amount of IRA money, and within 3 to 4 months get a return of 40 to 50%.  When this situation has arisen in the past I have done it with normal money and just paid the tax, the last time i used my IRA money and got the gain tax free, but i have been thinking about the strategy of contributing way more than i am allowed to my IRA, getting the gain, and paying the 6% excise tax, pulling the contribution out, but keeping the say 40% profit to grow tax free forever.

Any one else done this / drawbacks im not thinking of.

MDM

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Re: Over stuffing an IRA
« Reply #1 on: September 18, 2018, 05:08:11 PM »
You may find Should I take 6% penalty for excess Roth IRA contribution since I had significant earnings? - Bogleheads.org of interest.

Note that "to grow tax free forever" requires used of a Roth, not traditional, IRA.

seattlecyclone

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Re: Over stuffing an IRA
« Reply #2 on: September 18, 2018, 06:39:02 PM »
Yeah, I'd go with Roth if I were you. If you're expecting your investment to grow much more than average, you'll likely be better off with capital gains tax in a taxable account than regular income tax in a traditional IRA. Roth is better still.

Do be careful that this investment opportunity is at a sufficient arm's length as to not count as a prohibited IRA transaction. I'm not sure about what the exact rules are here, but you really don't want a prohibited transaction.

As to the excise tax, it is just 6% per year. To get out of paying that tax next year, you can either withdraw the excess principal, or just not make a new contribution the next year. Every dollar you contribute less than your ordinary contribution limit counts the same as a withdrawal of a dollar in excess contributions from a previous year.

zoro

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Re: Over stuffing an IRA
« Reply #3 on: September 19, 2018, 07:14:22 AM »
Thanks for the article MDM interesting. Good point on ROTH I think this may work. One of the special situations im thinking about is a mutual bank conversion, so it is arms length
The most recent one I did was CLBK which was offered at $10 in the IPO (it isnt really an IPO which is why the opportunity exists), and they allowed me to put in $550k. Due to the math of how they work, it gained 63% on the day. I was able to sell all my mutual funds in my ROTH and put all of my IRA into the offer via the broker, (fidelity will do it ameritrade wont as i discovered)
It got me thinking about some of the others i have done for example Investors bank in their second step allowed up to $2.6million to be invested at $10, and Beneficial allowed $1.5M , so hence the question if I didnt have enough in my IRA, could i follow the strategy of overstuffing from my regular account.  Anyhow I have accounts at 512 mutual banks and insurance companies all over the US, which I view as a call option on the eventual mutual conversion of the embedded equity, these will eventually all convert.  It would be wonderful if I can get these gains to be capital gains free.

thanks again.

elysianfields

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Re: Over stuffing an IRA
« Reply #4 on: September 27, 2018, 05:37:31 AM »
Anyhow I have accounts at 512 mutual banks and insurance companies all over the US, which I view as a call option on the eventual mutual conversion of the embedded equity, these will eventually all convert.

@zoro, Can you point me to a resource listing these mutual banks & insurance companies?

Peter Lynch famously made lots of money for his investors by buying such firms at the IPO, and he joked about travelling around the country and opening accounts at all of them so he could have his finger on the pulse of all these mutual banks & insurance companies.
« Last Edit: October 05, 2018, 12:50:08 PM by elysianfields »