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Inspired by a worthless post on how to borrow money tax free from an IRA I present an equally complicated way that you can actually put as much money as you can afford into a Roth IRA.

The gist of it is you're going to open two Roth IRAs simultaneously and take completely opposite positions in the two. You will use a complex options strategy to make it very likely that one account will go broke while the other doubles in value. You will then "undo" the contribution to the loser account, while leaving the winning account intact. A contribution can be undone by simply contacting the broker who will return to you your original contribution plus any earnings or minus any losses. Once undone it's like you never made the second contribution so you just have one account with double the yearly contribution limit. The contribution limit for 2013 is $5,500 so the winning account will have $11,000. If that's all you want to do you stop, otherwise continue:

Make two more accounts, do the same trick. Now you have two accounts with $11,000 and two zeroed accounts that have been undone. You then bet the two $11,000 accounts against each other so you have just one account left with $22,000. By now you get the point and you can keep on doing this forever in theory, by simply undoing contributions except for the last one which has all the money in it. Because you always bet on opposite sides of an option bet you're only ever out your commissions.

The specifics of why this should work:

We all know you can only contribute $5,500 to your IRA for the year. But you can open as many IRAs as you want so long as you withdraw all excess contributions and earnings before the end of the year. Publication 590 says: "If you withdraw contributions (including any net earnings on the contributions) by the due date of your return for the year in which you made the contribution, the contributions are treated as if you never made them. If you have an extension of time to file your return, you can withdraw the contributions and earnings by the extended due date. The withdrawal of contributions is tax free, but you must include the earnings on the contributions in income for the year in which you made the contributions." So even if I make 64 accounts at the start of the year and have them battle against each other until there is just one account standing with all the money, I am technically fine so long as I withdraw all contributions for all but 1 of the accounts. I just pick all of the losing accounts to undo, none of which have any earnings to include in income (note you cannot deduct the losses), and I am left with one account with a giant balance. It's as if the first 63 accounts never happened and I just got incredibly lucky with options bets on that one account.

Now what investment could you make that would guarantee one account to double in value and the other to go to zero? You need a broker that will let you trade option spreads. In general IRAs cannot hold short positions in stocks or options, because those have infinite potential losses and they would not let your IRA go negative. But you are allowed to short an option if you limit you loss by buying another option that will offset any losses after a certain point. Let's say the SPY ETF is at $146. What you would do with your $5,500 short 55 call options with a $146 strike while simultaneously buying 55 call options with a $147 strike in the first account. On your second account you do the opposite and buy the 55 $146 strike call options while shorting the 55 $147 strike options. Now the first account will go broke if at the end of the contract SPY is anywhere above $147, and will double in price (net of spread and commissions) if the price ends at anything under $146. The other account will do the opposite. It will double if SPY ends above $147 and be broke if it ends under $146. If it ends in the middle one account will make some money and other will lose the same amount.

Now if you followed any of that, you will probably be thinking you will get killed in commissions and bid/ask spread by buying so many contracts, and while that is the case you could certainly choose much wider spreads which would require you to buy many fewer contracts. If you chose a $5 spread, 145/150 for example, you would only need 11 contracts per account to be pull this off. The downside is you make it more likely that the price will end in the middle and leave both accounts with some money, which would make the process trickier to continue (but not impossible).

So there's my strategy. I can't imagine anyone bothering to try and pull it off on a large scale but from everything I've read it should work. I should also mention you lose the ability to withdraw your contributions tax free like you would have in a normal Roth, because by the end you would have just one account left with all earnings. In my example you have $352,000 which is tax free at 59 1/2, but if you had to take the money out before then it would be subject to tax and penalties, so be sure you won't need the money before retirement if attempting this.

Edit: Also, I realized my math is a little off. If you short an on the money call and buy a $1 out of the money call you have a net credit that's more like 50 cents, so it would take around double the amount of contracts I initially said.

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Holy crap! Even if this eventually gets called out by the IRS, it is still a pretty genius scheme. The way you explain... (more)

Dus10 (Jan. 30, 2013 @ 5:36a) |

What about using this technique to lower/avoid taxes on IRA conversions. Ie. invest in a losing trade in your Trad. IR... (more)

RidicuRuss (Mar. 31, 2013 @ 6:55p) |

Please let me know these winning trades in advance - I'll be happy to make them and pay taxes.

In practice, a trade can... (more)

xerty (Mar. 31, 2013 @ 7:21p) |

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How do you undo your contribution to the account that lost everything?

Won't taking the losing side of all those trades mean you have lost as much in one series of accounts as you have gained in the other? So you paid 2x +fees what you end up with in the "winning" account? This cost is higher than any reasonable tax advantage you gain from having the money in IRAs.

supersnoop00 said:   How do you undo your contribution to the account that lost everything?

or more specifically "withdraw contributions" if you've already lost them.

InTrouble said:   Won't taking the losing side of all those trades mean you have lost as much in one series of accounts as you have gained in the other? So you paid 2x +fees what you end up with in the "winning" account? This cost is higher than any reasonable tax advantage you gain from having the money in IRAs.

Of course, this isn't a guide to make infinite money with options or I wouldn't be sharing it.

Fees may be somewhat high, but for tight option spreads you can get it down to around $1/contract with places like Interactive Brokers. You will also face a bid ask spread which for a very highly traded option should be an additional $0.50 a contract or so (one half of one cent per share). So you would lose $22 to $110 of your $5,500 depending on how aggressive you are with your options. If you doubled every time but also lost $110 (2%) to fees you would have to put in x to yield y:

$11,000 to yield $10,780
$22,000 to yield $21,129
$44,000 to yield $41,412
$88,000 to yield $81,168
$176,000 to yield $159,090
$352,000 to yield $311,817

But you can probably do a bit better than that with proper planning.

InTrouble said:   Won't taking the losing side of all those trades mean you have lost as much in one series of accounts as you have gained in the other? So you paid 2x +fees what you end up with in the "winning" account? This cost is higher than any reasonable tax advantage you gain from having the money in IRAs.

Last I checked paying 8.95/trade is less expensive than your marginal tax rate on multiple thousand dollars of capital gains.

Only catch here is how to effectively reverse a contribution to an IRA that you've lost everything in. Oh and the fact that youll probably get audited by the IRS and put in guantanamo for lolz

i am not sure if it is worth the trouble and if it still make sense after transaction costs and spread, but green for original thinking!

You try it first and let us know how it goes.

Hmm, if you could somehow take out the original contribution from the 'winning' account without losing your gains, you should be able to do this, but this appears to make this process a multi-year situation where you can't really do this the first year you start the account.

As a side note, your spouse need not be working to have a funded Roth IRA (can use earned income from working spouse), so most households should have 2 Roth IRAs anyway to grow.

Rasheed

supersnoop00 said:   How do you undo your contribution to the account that lost everything?

It would vary by broker. Fidelity has this form: http://personal.fidelity.com/accounts/pdf/returnofexcess.pdf

You would ask them to return the $5,500 net of earnings. And they would do return the 35 cents or whatever you had left after commissions when you lose everything.

Im thinking after you do this 2-3 times you would start getting shitlisted by brokers and you'd have an IRS agent at your door come tax time.

awstick said:   Now what investment could you make that would guarantee one account to double in value and the other to go to zero? You need a broker that will let you trade option spreads. In general IRAs cannot hold short positions in stocks or options, because those have infinite potential losses and they would not let your IRA go negative.

There is no way for any option or leveraged fund to go negative. You are only limited to our investment. Rydex has leveraged funds, including inverse funds, which are essentially short funds; the NAV never goes to zero. The worst that can happen to an option is that it runs out of value, in which case it's gone.

It's like going to a sports book - the worst that can happen is that you lose your bet.

jackbondlove said:   awstick said:   Now what investment could you make that would guarantee one account to double in value and the other to go to zero? You need a broker that will let you trade option spreads. In general IRAs cannot hold short positions in stocks or options, because those have infinite potential losses and they would not let your IRA go negative.

There is no way for any option or leveraged fund to go negative. You are only limited to our investment. Rydex has leveraged funds, including inverse funds, which are essentially short funds; the NAV never goes to zero. The worst that can happen to an option is that it runs out of value, in which case it's gone.

It's like going to a sports book - the worst that can happen is that you lose your bet.


Shorting an option or stock can lose you more than your original stake, and while a broker would liquidate you before it happened your account could go negative. If I short a stock or option which triples in value I've lost 200% of my wager. If you short an option that's worth $1 you get $1 in cash, but if the option goes to $3 you have a position of $1 cash and -$3 in options.

But this is besides the point. That's how it would work in a cash account. A IRA is different in that they won't let you have a naked short position in any stock or option (possible in futures contracts, but that's another story).

Don't options typically contain a cost premium for the time from expiration that you will lose out on regardless of what side ends up?

EdMcK515 said:   Don't options typically contain a cost premium for the time from expiration that you will lose out on regardless of what side ends up?

Yes options have time premiums but that's not really relevant here. You could say that one account will be buying that premium and the other will be selling it. Both accounts are initiating positions that will end at exactly zero or exactly double (minus commissions) at the expiration of the option.

jd2010 said:   Im thinking after you do this 2-3 times you would start getting shitlisted by brokers and you'd have an IRS agent at your door come tax time.

Brokers get their commission, doubly so, so they wouldn't really care much. And if this is a legit loophole, what is the IRS agent going to complain about? Just have a good accountant and tax attorney on retainer. Many major corporations are stowing cash offshore to avoid repatriating taxes, which some find distasteful tax avoidance, but so far nothing illegal until they close the loopholes.

This is just a more aggressive version of the "remove and re-contribute" strategy for IRAs, where you can do some extra paperwork to undo your first IRA contribution when you pick a dud stock and replace it with another full $5500 to try again later that year. It's legal, but of course taken to extremes will involve tons of complicated paperwork and tax accounting. Some of FWFs best tax experts were discussing it back in 2008.

http://www.fatwallet.com/forums/arcmessageview.php?catid=52&thre...

If youre still around, thanks again frootmall!

Wow! A self-circular Ponzi scheme. Madoff would be proud!... LOL

I don't get it at the part where you said you withdraw all the losing accounts to undo.
So basically you contribute at the beginning of the year, and then withdraw the money at the end of the year. But why only losing accounts? From what I know, you can withdraw money from winning account up to the contribute limit without paying penalty and tax.

*I try once to withdraw the contribute limit from TD Ameritrade on my Roth IRA, but the process take awhile and you need to submit a form.

So if you are around age 59, you can put all your money into Roth IRA and start enjoying tax-free return it yields year after year. This can be big for people with a lot of cash and close to retirement age.

awstick said:   Inspired by a worthless post on how to borrow money tax free from an IRA I present an equally complicated way that you can actually put as much money as you can afford into a Roth IRA.

The gist of it is you're going to open two Roth IRAs simultaneously and take completely opposite positions in the two. You will use a complex options strategy to make it very likely that one account will go broke while the other doubles in value. You will then "undo" the contribution to the loser account, while leaving the winning account in tact. The contribution limit for 2013 is $5,500 so the winning account will have $11,000. If that's all you want to do you stop, otherwise continue:

Make two more accounts, do the same trick. Now you have two accounts with $11,000 and two zeroed accounts that have been undone. You then bet the two $11,000 accounts against each other so you have just one account left with $22,000. By now you get the point and you can keep on doing this forever in theory, by simply undoing contributions except for the last one which has all the money in it. Because you always bet on opposite sides of an option bet you're only ever out your commissions.

The specifics of why this should work:

We all know you can only contribute $5,500 to your IRA for the year. But you can open as many IRAs as you want so long as you withdraw all excess contributions and earnings before the end of the year. Publication 590 says: "If you withdraw contributions (including any net earnings on the contributions) by the due date of your return for the year in which you made the contribution, the contributions are treated as if you never made them. If you have an extension of time to file your return, you can withdraw the contributions and earnings by the extended due date. The withdrawal of contributions is tax free, but you must include the earnings on the contributions in income for the year in which you made the contributions." So even if I make 64 accounts at the start of the year and have them battle against each other until there is just one account standing with all the money, I am technically fine so long as I withdraw all contributions for all but 1 of the accounts. I just pick all of the losing accounts to undo, none of which have any earnings to include in income (note you cannot deduct the losses), and I am left with one account with a giant balance. It's as if the first 63 accounts never happened and I just got incredibly lucky with options bets on that one account.

Now what investment could you make that would guarantee one account to double in value and the other to go to zero? You need a broker that will let you trade option spreads. In general IRAs cannot hold short positions in stocks or options, because those have infinite potential losses and they would not let your IRA go negative. But you are allowed to short an option if you limit you loss by buying another option that will offset any losses after a certain point. Let's say the SPY ETF is at $146. What you would do with your $5,500 short 55 call options with a $146 strike while simultaneously buying 55 call options with a $147 strike in the first account. On your second account you do the opposite and buy the 55 $146 strike call options while shorting the 55 $147 strike options. Now the first account will go broke if at the end of the contract SPY is anywhere above $147, and will double in price (net of spread and commissions) if the price ends at anything under $146. The other account will do the opposite. It will double if SPY ends above $147 and be broke if it ends under $146. If it ends in the middle one account will make some money and other will lose the same amount.

Now if you followed any of that, you will probably be thinking you will get killed in commissions and bid/ask spread by buying so many contracts, and while that is the case you could certainly choose much wider spreads which would require you to buy many fewer contracts. If you chose a $5 spread, 145/150 for example, you would only need 11 contracts per account to be pull this off. The downside is you make it more likely that the price will end in the middle and leave both accounts with some money, which would make the process trickier to continue (but not impossible).

So there's my strategy. I can't imagine anyone bothering to try and pull it off on a large scale but from everything I've read it should work. I should also mention you lose the ability to withdraw your contributions tax free like you would have in a normal Roth, because by the end you would have just one account left with all earnings. In my example you have $352,000 which is tax free at 59 1/2, but if you had to take the money out before then it would be subject to tax and penalties, so be sure you won't need the money before retirement if attempting this.

Edit: Also, I realized my math is a little off. If you short an on the money call and buy a $1 out of the money call you have a net credit that's more like 50 cents, so it would take around double the amount of contracts I initially said.


Nice work, bro.

Here is the shorthand version if all the option talk makes you dizzy:

1. Open 2 Roth accounts at $5500 each - or whatever the annual limit at the time.
2. Transfer money from one account to another - by way of options. There is a transfer fee (slippage, commissions, etc). The transfer method detailed in OP's example is options - but if you are creative, you can find a different method.
3. Scale up slowly by repeating the above 2 steps
4. Dodge IRS bullets and keep good records

freejunkmail said:   So if you are around age 59, you can put all your money into Roth IRA and start enjoying tax-free return it yields year after year. This can be big for people with a lot of cash and close to retirement age.
It is not without substantial risks. Your broker could shut you down. The IRS could make an example of you - for driving a truck through a legal loophole. You lose track of your numerous accounts, and take the same side of the transaction and get wiped out.

please rename this title "how to significantly raise your chances on being audited by the IRS"

you could also trade SPX instead of SPY since the contract size is 10x bigger and is cash settled

Why not just do the following?:

1) Buy a super thinly traded worthless stock or option in a IRA account. Preferably a bankrupt company. 1 share or 1 call option for like $10 dollars so someone will sell it to you.
2) Put that share or option sell limit order for $1,000,000.
3) Call up distant cousin's friend's gf's brother and ask him to buy it for $1,000,000. Reimburse him $1,000,000 cash.

On top of that, your cousin's friend's gf's brother can take a loss of $1,000,000 once the company goes bankrupt.

You sell to your cousin's friend's gf's brother to avoid self dealing, which is illegal.

Posts like this verify the adage that anyone can put anything on the internet.

What ever happened to just using Prosper or any other self directed IRA to make loans to non-self dealing parties such as a trusted friend or brother/sister?

The IRS has said that they're on to wash sales / straddles between accounts using identical or substantially identical assets. Their language referred to using this method to move funds between taxable and exempt accounts, but in my mind it means they know to look for this kind of activity everywhere now. Tread carefully.

-codename47, there's a whole list of family members that count as disqualified persons. Better stick with the friend.

TravelerMSY said:   The IRS has said that they're on to wash sales / straddles between accounts using identical or substantially identical assets. Their language referred to using this method to move funds between taxable and exempt accounts, but in my mind it means they know to look for this kind of activity everywhere now. Tread carefully.

-codename47, there's a whole list of family members that count as disqualified persons. Better stick with the friend.

Traveler - I think their extension of wash sales to IRAs was narrowly done and they aren't getting the stock trade data for IRAs to check anyway (and unreported wash sales aren't a high priority since they don't let you avoid tax, only delay it). OPs example has the Roth transacting with itself, which should be fine, but with liquid options, there's no reason not to have an intermediary market maker to remove any doubt. Also, disqualified persons for self dealing do not include siblings - see below:

http://www.trustetc.com/new/rules-and-regulations/plain-english/...

roadwarrior313 said:   Why not just do the following?:

1) Buy a super thinly traded worthless stock or option in a IRA account. Preferably a bankrupt company. 1 share or 1 call option for like $10 dollars so someone will sell it to you.
2) Put that share or option sell limit order for $1,000,000.
3) Call up distant cousin's friend's gf's brother and ask him to buy it for $1,000,000. Reimburse him $1,000,000 cash.

On top of that, your cousin's friend's gf's brother can take a loss of $1,000,000 once the company goes bankrupt.

You sell to your cousin's friend's gf's brother to avoid self dealing, which is illegal.


Re #3: Assuming this is traded on a market, his $1 MM limit order will first buy out the shares of everyone else with sell orders less than $1 MM.

Why not sell from a Roth IRA to a regular brokerage account? Couldn't you then reap the tax-free benefits of a gain, and also show a loss (somehow) on the normal account? Thus, getting tax-free "gains," getting more than $5000 into your Roth IRA within a year, and also getting some tax deductions from the "loss" in the normal account?

jaytrader said:   Why not sell from a Roth IRA to a regular brokerage account? Couldn't you then reap the tax-free benefits of a gain, and also show a loss (somehow) on the normal account? Thus, getting tax-free "gains," getting more than $5000 into your Roth IRA within a year, and also getting some tax deductions from the "loss" in the normal account?
Because its self dealing and it will blow up your whole IRA if the IRS notices. They have noticed this when people tried this in the past, and it didn't got well for them - they didn't get to deduct the losses for their taxable account either.

jaytrader said:   Why not sell from a Roth IRA to a regular brokerage account? Couldn't you then reap the tax-free benefits of a gain, and also show a loss (somehow) on the normal account? Thus, getting tax-free "gains," getting more than $5000 into your Roth IRA within a year, and also getting some tax deductions from the "loss" in the normal account?

Is there a side benefit of a tax loss? This seems to trigger the movement of funds between taxable and exempt accounts TravelerMSY mentioned. This would get a lot more notice since the amount of tax avoidance/evasion is immediate and significantly more.

TravelerMSY said:   The IRS has said that they're on to wash sales / straddles between accounts using identical or substantially identical assets. Their language referred to using this method to move funds between taxable and exempt accounts, but in my mind it means they know to look for this kind of activity everywhere now. Tread carefully.

-codename47, there's a whole list of family members that count as disqualified persons. Better stick with the friend.

Here's a summary of the technique, if I understand correctly.

1) Open a Roth IRA at brokerage A and contribute $5,500 ("Roth A")
2) Open another IRA at brokerage B ("Roth B") and contribute another $5,500. You have now contributed a total of $11,000 toward IRAs, $5,500 more than the IRS limit.
3) Purchase a series of high-risk-high-reward stock options in the Roth A account. Try to make it so that you either double your money, or lose everything (i.e. "double or nothing").
4) Do the same thing with Roth B, with options that inversely correlate to the options in Roth A. In other words, make it so that if Roth A doubles, Roth B loses everything, while if Roth A loses everything, Roth B doubles. This way, your net loss should be 0 (minus commissions and such).
5) If all goes well, Roth A will double in value to $11,000, while Roth B will lose everything and fall to 0 (or vice versa).
6) Withdraw your contribution from whichever Roth lost all the money, and treat the withdrawal as a "return of excess contribution." This will undo the $5,500 contribution you initially made to the Roth (even if the account lost money, if you withdraw what's left of it, the entire $5,500 contribution that was originally made is considered to never have happened). Effectively, you have now contributed $11,000 into a Roth, but you will not be penalized for exceeding the $5,500 limit, because the IRS thinks you've only contributed $5,500. This is perfectly legal.
7) Repeat steps 1-6 with two more accounts, Roth "C" and Roth "D". After this is done, one of them will have $11,000 (Roth C), and the other will have $0 (Roth D), and you will "undo" the contribution to Roth D, the one with $0. You will now have two Roth accounts with $11,000 each (Roth A and Roth C), and you will have contributed $11,000 toward IRAs - $5,500 more than the legal limit.
8) Repeat steps 3-6 by betting Roth A and Roth C against each other. One will double to $22,000 (Roth A, for instance), while the other falls to $0. Undo the contribution to the "loser" account (Roth C), which erases the $5,500 contribution, once again reducing your contributions from the year back to the legal limit of $5,500. Effectively, you have now contributed $22,000 into an IRA, without facing any penalties for exceeding $5,500.

Keep repeating these steps, and double the size of the IRA each time through the cycle. Remember, you're not profiting from this; all the money you end up with in the final IRA is supplied by you, so it's zero sum. The purpose is to funnel extra money into the IRA, circumventing the normal $5,500 annual limit by exploiting loopholes in the way the law treats "returns of excess contributions."

One possible SNAFU: It might raise some red flags if you try to reuse the same Roth account more than once in this "cycle". In other words, if you're constantly contributing $5,500 to an IRA, and then turning around and saying "whoops, I put too much in, let me undo that", they might get suspicious and try to cut you off (not to mention reporting you to the IRS for possible tax evasion).

macosx said:   Is there a side benefit of a tax loss? This seems to trigger the movement of funds between taxable and exempt accounts TravelerMSY mentioned. This would get a lot more notice since the amount of tax avoidance/evasion is immediate and significantly more.
It already did, in 2003.

http://www.irs.gov/Retirement-Plans/EP-Abusive-Tax-Transactions-...

Send a letter to the IRS Commissioner for opinion and guidance first.

Haid gonna splode.

But along these lines, I have a very interesting question:

- why didn't Mark Zuckerberg sell some of his early Facebook shares to his IRA account (assuming he had enough of an IRA account, e.g., from working during high school and college, and saving some money into the IRA).

- same question goes to Sergey Brin and Larry Page,

- Bill Gates gets a pass, because when Microsoft was conceived, IRAs were just getting started.

I mean, just imagine having 1% of a 100+ B company in an IRA account. And by an IRA account, I mean, a ROTH IRA account.

Skipping 65 Messages...
RidicuRuss said:   invest in a losing trade in your Trad. IRA And simultaneously a mirror image winning trade in your Roth IRA.
Please let me know these winning trades in advance - I'll be happy to make them and pay taxes.

In practice, a trade can go either way, and when dealing with IRAs, one direction will have favorable tax outcomes but the opposite direction will have a negative tax outcome. Also, its hard to short in IRAs.



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