Moving Money From IRA to ROTH IRA

Discussion in 'Options' started by tradersatwork, Dec 24, 2005.

  1. "What if we long a deep in the money put/LEAPS put in IRA and long a deep in the money call/ LEAPS Call of the same underlying in RothIRA and actually we are speculating that the underlying to be the upside so when we close the position one day, IRA put option will lost money while your RothIRA call increase in value. If we can continue to do this with success we'll be able to withdraw from RothIRA tax free when we are 65 (damn IRS). Other than the commission this sound good to me cause I think I already pay too much tax in my life.

    The 2 bad case scenario will be
    A.The stock doesn't move at all you lost time value in both contract.

    B. Your speculation is wrong and stock drop significantly and your IRA earned money and your RothIRA lost (which is ok, we still have the money just try next one)"

    But there will be 2 good case too, if the stock drop significantly to the call strike (or rise significanly to the put strike) the time value will be possibly more than the TV combine when the trade is established (the position is worth more $ when they are established), if this happen on the upside. other than moving the money from IRA to ROTH we earn some extra $

    How will IRS think about this? Any thought?
  2. nkhoi

    nkhoi Moderator

    if you take money out at 65, you pay tax if you have profit in IRA, you don't pay tax if you have profit in Roth. And depending on whether or not you claimed deductible for your IRA you may also have to pay tax on IRA principle. So what should IRS think about what?
  3. I don't see anything wrong or illegal about your idea, but there are obviously some practical drawbacks that you mentioned.

    Another approach might be to go long the stock in your Roth IRA and create a synthetic short position (long put, short call) in your regular IRA. You might have to buy a far OTM call to cope with the fact that most brokers don't allow naked short calls in an IRA. This long call also gives the possibility of making a net profit if the stock skyrockets.

    Of course, this strategy (called a conversion) has different drawbacks than your strategy, but it's not necessarily better. The big difference is that you probably will not have as much TV invested. The other difference is that you will not make a net profit if the stock plunges.

    Another simpler strategy is to have a short Put in your IRA and a long call in your Roth. Virtually no TV invested that way, but no net profit and a net loss is possible. No doubt there are other strategies as well.

    Basically, if you are right you will convert taxable money into tax free and if you are wrong the opposite happens. Personally I'd want a more foolproof strategy before doing this. Especially considering that conservative investment techniques can produce profits in both accounts.

  4. luh3417


    You are allowed to do a partial transfer of funds from your Traditional IRA to your Roth IRA every year. There are 2 problems however: interactive brokers does not let you do this, and the money becomes taxable income. Its additional marginal taxable income for the year you do the transfer.

    So the question is an interesting one: is there a strategy (with or without options) whereby you take half of a position in your Traditional IRA and another half in your Roth IRA, that effectively moves money from one the Traditional to the Roth.

    Of course, if you knew for certain which end of the transaction would go up, you'd just use that in BOTH accounts! So its a strategy that you'd have to use repeatedly, and even then it would really be a random walk. Still I wonder about, say, a covered call, where the underlying is in the Traditional and the covering option is in the Roth. I mean if you always did your covered calls this way would you eventually bleed all your money over to the Roth? And lastly, one wonders how the IRS would feel about all this.
  5. Relative to your covered call idea, that would require a naked call in your Roth and I don't know of any broker that allows naked calls in an IRA.

    Anyway, I'll bet that the IRS will take a dim view of such shenanigans but in my meager knowledge I don't know of any laws that prohibit it.

  6. luh3417


    How about this: sell naked put and naked call in your traditional IRA, buy long call and long put in your Roth IRA. If the stock ever makes a decent move in either direction, you lose money in the traditional and gain it in the Roth. Of course, you're out 4 bid-ask spreads, but that's certainly less than your marginal tax percentage.
  7. luh3417


    Hmmm, you know, this whole question is rather interesting. Now, one can take opposite sides of just about any position in each of the IRA's. But in another sense, if you can predict a loser, you are in effect predicting a winner. And in an efficient market, you can't give away a free lunch even if you try. So while it would be nice to beat the tax man in this scenario, I now feel its basically impossible. Please correct me if you have an angle.
  8. luh3417


    I wish some of you other posters found this problem as interesting as I do. You know, the great thing about trading options in your IRA is, you don't have to worry about the tax implications. Until this thread started at least. You guys better get off the dime or I'll have this figured out.

    I now feel that the problem is not impossible, its more like, improbable. But let's look at it this way. Suppose you had $4K in your Roth and $100K in your traditional, that you wanted to move over. You could take both sides of a 25:1 "bet" in the respective IRA's. And there is a (4%) chance you would move all $100K over (losing it in the traditional IRA and making it as a long shot in the Roth). The other point is, next year you can re-up, put another $4K in your Roth, and try the bet again. The odds might be 26:1 this time. Or they might be only 10:1 if you had a partial win. Now, if one did this for 20 or 30 years its quite probable that you could pull off the conversion. Surely after all that hard work, fighting against fair odds, the IRS wouldn't have a problem with your trades would they?

    The only question is, what option strategy would be suited to running this? Considering also the friction of paying 50 bid-ask spreads over 25 years.
  9. With that much effort, I think I could probably make up for the tax and then some just trading like normal.

    Which is worse, tax or commissions?
  10. But don't listen to me. I really dislike the idea of having my money locked up until I'm 60. In regards to my IRA and 401K, I consider them a gift to my children as I will probably never get to them myself.
    #10     Jan 11, 2006