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If you exceed $5,000 in a year then the excess amount will be subject to a 6% penalty each year that it remains in the IRA.
Any earnings on the excess contribution that remain in the account after the tax return due date for the tax year in which the excess was made, will be subject to ordinary income taxes (not capital gains rates) when eventually withdrawn.
See pages 48 - 49 - http://www.irs.gov/pub/irs-pdf/p590.pdf
So is there any way around this?
I'd basically like to contribute 40K this year. I'm not self employed though so I know I probably wouldn't qualify for a SEP IRA I think it's called.
There is no way to contribute more than $5,000 to a traditional or Roth IRA without being subject to a penalty. However, you could obtain the same tax-deferred benefit by investing in a nonqualified variable or fixed annuity and there is no limit. In a nonqualified annuity the earnings only become taxable when you eventually withdraw them. However, you would be limited to the investment options within the annuity and could not purchase individual stock and bonds as you could in an IRA.
What if I started a Business and then started a SEP IRA. Could I use my own money to invest in the business and then plunk it into an IRA?
Yes, if you started a business then you could contribute up to the lessor of 25% of your earnings or $49,000. If the business was not incorporated, then the percentage is actually calculated as 20% of your net self-employment earnings. If you currently do not defer any of your income into a 401(k) or 403(b) through your employer, then you could establish a 401(k) for your new business and possibly defer more than a SEP depending on the amount you earn from the business. For example, if your self-employment earnings are $30,000 then you could only contribute about $6,000 to a SEP but you could contribute $22,500 to a 401(k) ($16,500 + $6,000) assuming you do not currently contribute to a 401(k).
One last question then I'm good. Thanks for your help and patience.
Can still contribute under 2010 to my IRA I have like 4000K I could still contribute tax free.
Yes, you have up until April 18th of this year to contribute for the 2010 year.
Nice. That is wonderful. Thank you.