First, I understand that there are set limits to how much I can contribute to my IRA per year in order to protect those funds from taxation. I think for 2017 it’s a maximum of $6,500.
But is there any rule stopping me from putting more of my already-taxed income into it? Let’s say I have $40,000 in a savings account. Could I transfer those funds into my IRA, but of course not claim it as a “contribution” on my 1040? I’ve already paid taxes on those funds, so am I free to do this?
I have tried to find the answer online but keep only getting info on the IRS’s yearly contribution limits for tax purposes.
What’s the goal here? You could place the post tax money into a Roth style ira quite probably within the same fund or account. But without knowing what you are trying to accomplish its hard to say.
My concern is that, being uninsured, in the case of a medical catastrophe, I would lose my life’s savings if the hospital sued and won a judgment against me. I understand that in many states, funds in an IRA cannot be seized in civil judgments.
A Roth would make sense. If you wanted liquidity a combination of a variety of single premium high cash value indexed life insurance or indexed annuity products would work too. All would or could be protected from a judgement. Again, depending on how you wanted to set things up and how you already have things set up.
If you had other concerns you would have other options.
No. It’s called an excess contribution. Excess contributions are taxed at 6 percent per year as long as the excess amounts remain in the IRA. The tax can’t be more than 6 percent of the combined value of all your IRAs as of the end of the tax year. Also, any income generated by the excess contribution is lost.
This is a very confusing topic for many people because of two very similar, but different rules.
If you the you have accidentally (or even deliberately) over-contributed to your IRA for the year, you have until the due date of your return (including extensions) to withdraw the excess contribution plus earnings in order to avoid the 6% tax on excess contributions for that year. But if you miss that deadline, in order to avoid the 6% tax in future years, you only have to withdraw the excess contributions by the end of the year, not the earnings.
For example, say you exceed the maximum contribution for 2016 by $1000. In order to avoid the 6% tax for 2016, you must withdraw the $1000 plus earnings by April 18, 2017. (You have an automatic extension until Oct 16, 2017 if you file your return or an extension by April 18.) In order to avoid an additional 6% for 2017, you only have to withdraw $1000 by Dec 31, 2017.
The 6% tax on excess contributions is in IRC § 4973. You’ll note that the tax only applies to excess contributions and not to earnings (see IRC § 4973(b)).
The special opportunity to withdraw your excess contribution until the due date of the return is in IRC § 408(d)(4). It specifies the contribution plus earnings. This applies only one time, in the year following the year for which the contribution was credited.
No IRA custodian is going to accept a contribution over $6500 (plus catch-up if you are over age 50) unless you lie to them and say it was a rollover from another IRA or employer retirement account. You’d have to open 7 IRA accounts with 7 different custodians to get away with it. Plus, as Duckster pointed out, you’d be subject to a 6% annual tax on excess contributions.