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elektronic said:   robobn said:    But what if you are chairman or CEO of a private firm with many investors and buy its shares for your Roth? SEC filings show that in 2001, while CEO of ­PayPal, tech investor Thiel bought 1.7 million shares of that company for 30 cents a share through his Roth. In 2002 eBay bought out PayPal for $19 a share—an apparent $31.5 million tax-free profit for Thiel. It also appears from a letter we discovered in a federal court case that some of Thiel’s early investment in Facebook was also through his Roth IRA. He now sits on Facebook’s board.


Of note: he had at least $510k in his Roth IRA when he bought those 1.7 million shares @ 30 cents each. Any idea on how he got there? 401k --> Traditional IRA --> Roth IRA conversion?


Probably some other investments that grew to that much in his Roth IRA. Rinse and repeat.

How is all the 'excess' money the one account accumulates not considered gains that you do not need to withdraw as they were earned on excess contributions?

Psycho41 said:   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to the Roth (even the account lost money, if you withdraw what's left of it, the entire $5,500 contribution that was originally made is considered to never have happened.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.mehrag said:   How can you withdraw money from a losing account to undo the $5,500 contribution when there is nothing left in it??BocephusSTL said: I've been wondering the same thing, and still haven't seen an answer to this question.DShaw94 said: I don't understand how you can withdraw/reverse $5,500 from an account that is now $0. You'd have to contrinbute an additional $5,500 to make that withdraw, so at that point your contributions to the Roth for the year would be $16,500. Eh?

When you withdraw money from an IRA and treat it as an "excess contribution", you are essentially undoing the original contribution, and it is treated as if you never made it in the first place.

If your IRA went up in value since you made the contribution, you must also withdraw the "profit" you made, and pay taxes and penalties on the gains. On the other hand, if your IRA went down in value, then you take out less than the original contribution. So in other words, when you undo an excess contribution, you don't just take out the same amount of cash you put in, you also account for any profit or loss that the money has made since you originally put it in.

For example, if you put $5,000 in an roth IRA, and you realize you were not eligible to make the contribution this year, you must withdraw it as a return of excess contribution. If the IRA has increased its value by 25%, then your original $5,000 contribution is now worth $7,500, and you must withdraw $7,500 from the IRA in order to "undo" the contribution. In this case, since you are pulling out $2,500 more than you put in, the extra $2,500 is considered "earnings" from the IRA, and is subject to taxes and penalties.

However, if the $5,000 in the IRA has lost value (say it's now worth only $3,000), then you can "undo" the $5,000 contribution, but you only have to take out $3,000, because that's what the original contribution is currently worth. If you want, you can then turn around and put $5,000 right back into the IRA, effectively sneaking an extra $2,000 into the IRA, because the original $5,000 contribution is considered to never have been made in the first place.

So that's how you can "undo" the $5,500 contribution from an account that has no money left in it. When the account has lost money, you don't have to withdraw as much as you put in, you just have to withdraw what it's now worth. And if it's now worth 0, you can undo the entire original $5,500 contribution without taking any money out. It doesn't matter how much you take out, it matters how much you put in to begin with. And if you put in $5,500 to begin with, you can "erase" that contribution without taking that much money out, as long as the account has lost money since the $5,500 was put in.

boden11 said: How is all the 'excess' money the one account accumulates not considered gains that you do not need to withdraw as they were earned on excess contributions?
None of the "excess" money in the account comes from excess contributions; it all came from the original $5,500. Remember, no single account received more than the $5,500 contribution limit. So what you do is, after you finish buying and selling options, you take the one account that has all the money in it (the one with the options that paid off), and say "that's the account I meant to contribute the money to; all the other accounts are the ones with the excess contributions, and so they're the ones that had their contributions undone." It's kind of betting on a roulette wheel and "undoing" all your losing bets, while keeping the winning ones.

gave a red to this post

I don't buy it. If the IRS starts out by looking at your aggregate Roth contributions, regardless of the number of accounts, then they're gonna do the same thing for gains/losses,regardless of the number of accounts. The logic of 'wiping out excess contributions with losses' will likely be applied on an aggregate basis, for the period the account was overfund. Example:
Roth IRA contributionsacct#1: $5,500
Roth IRA contributionsacct#2: $5,500
Gain Acct#1: $15,000
Loss Acct#2 ($5,500)
Total IRA account aggregate: $20,500
Total Gain/Loss for period: $9,500
Total Excess contributions for period: $5,500
Total Excess Gain/Loss for period: $4,750

So to avoid penalties for excess contributions, you're going to have to remove $10,250 from Acct#1 before the period end. I mean, if you have 100 Roth IRA account it's going to create an accounting quagmire for the IRS to unravel but I think that's what they'll do. Directing your losses into separate accounts from your gains, shouldn't change your overall taxable or tax-exempt numbers. That's what they were trying to do at Enron with those SPE's at the end of every period, to manipulate their Net Income.

Opinions?

Also, there are trading costs for each trade in 100s of account that should be considered...
M profits would have been doubled if I exclude the transaction cost and in your case it will be halved..

The Options trading has time premium which has to be paid for all the trades even if the are opposite.
Theoretically you can say that one account doubles while other disappears but practically this may not be possible since you will also lose time premium....
Can you send the Complex Options trade that you mentioned ...

Mrsam said:   The Options trading has time premium which has to be paid for all the trades even if the are opposite.
Theoretically you can say that one account doubles while other disappears but practically this may not be possible since you will also lose time premium....
Can you send the Complex Options trade that you mentioned ...

Time value is not the issue, as you're shorting the same option in another account, so you cancel that out. I think the example in the OP was his complex options example. I assume by the lack of posts of a true double/nothing strategies with no unlimited loss risk, that one does not exist, which makes any discussion on this topic pointless.

mistadeal said:   Mrsam said:   The Options trading has time premium which has to be paid for all the trades even if the are opposite.
Theoretically you can say that one account doubles while other disappears but practically this may not be possible since you will also lose time premium....
Can you send the Complex Options trade that you mentioned ...

Time value is not the issue, as you're shorting the same option in another account, so you cancel that out. I think the example in the OP was his complex options example. I assume by the lack of posts of a true double/nothing strategies with no unlimited loss risk, that one does not exist, which makes any discussion on this topic pointless.


I've already been over this - the prices change almost instantly so posting a specific trade is worthless, but AAPL is around 522.50 at the moment and I got these quotes on options for use in a 520/525 spread:

Leg Description Last Change Bid Size Bid Ask Ask Size
1 Feb 16 2013 520 Call $25.70 -1.95 11 25.95 26.10 54
2 Feb 16 2013 525 Call $23.20 -1.78 89 23.50 23.60 51

With a midpoint of 2.48 I could get orders filled at 2.50 bid and 2.45 ask.

Account A buys 21 contracts for $5,250 + $20 commission = $5,270
Account B sells 21 contracts for $5,145 - $20 commission = $5,125 net

If Apple ends over $525 on Feb 16 then account A's contracts will be worth 21 x $5.00 x 100 = $10,500 and it had $230 in cash left for a gain of $5,230. Account B will owe $10,500, less the $5,125 it received in cash for a net loss of $5,375. Net result is account A gets $5,230 in Roth contributions for a net cost of $145.

If Apple ends under $520 then all options are worthless and account A loses $5,270 while account B profits $5,125. Account B will have an extra $5,125 for a net cost of $145.

But technically all of the gains did come from the excess money as you placed complimentary trades -- the gains just happen to show in the other account. Tell you what, you do it and then tell me what the IRS thinks. This is plain jackassery.

boden11 said: How is all the 'excess' money the one account accumulates not considered gains that you do not need to withdraw as they were earned on excess contributions?
None of the "excess" money in the account comes from excess contributions; it all came from the original $5,500. Remember, no single account received more than the $5,500 contribution limit. So what you do is, after you finish buying and selling options, you take the one account that has all the money in it (the one with the options that paid off), and say "that's the account I meant to contribute the money to; all the other accounts are the ones with the excess contributions, and so they're the ones that had their contributions undone." It's kind of betting on a roulette wheel and "undoing" all your losing bets, while keeping the winning ones.

So what happens if it ends up in the middle?

so how do I fund this with a credit card?

awstick said:   mistadeal said:   Mrsam said:   The Options trading has time premium which has to be paid for all the trades even if the are opposite.
Theoretically you can say that one account doubles while other disappears but practically this may not be possible since you will also lose time premium....
Can you send the Complex Options trade that you mentioned ...

Time value is not the issue, as you're shorting the same option in another account, so you cancel that out. I think the example in the OP was his complex options example. I assume by the lack of posts of a true double/nothing strategies with no unlimited loss risk, that one does not exist, which makes any discussion on this topic pointless.


I've already been over this - the prices change almost instantly so posting a specific trade is worthless, but AAPL is around 522.50 at the moment and I got these quotes on options for use in a 520/525 spread:

Leg Description Last Change Bid Size Bid Ask Ask Size
1 Feb 16 2013 520 Call $25.70 -1.95 11 25.95 26.10 54
2 Feb 16 2013 525 Call $23.20 -1.78 89 23.50 23.60 51

With a midpoint of 2.48 I could get orders filled at 2.50 bid and 2.45 ask.

Account A buys 21 contracts for $5,250 + $20 commission = $5,270
Account B sells 21 contracts for $5,145 - $20 commission = $5,125 net

If Apple ends over $525 on Feb 16 then account A's contracts will be worth 21 x $5.00 x 100 = $10,500 and it had $230 in cash left for a gain of $5,230. Account B will owe $10,500, less the $5,125 it received in cash for a net loss of $5,375. Net result is account A gets $5,230 in Roth contributions for a net cost of $145.

If Apple ends under $520 then all options are worthless and account A loses $5,270 while account B profits $5,125. Account B will have an extra $5,125 for a net cost of $145.


I'm not trying to give you a hard time here, but your examples are really off. I don't know if it's chalked up to human error or incorrect/lack of knowledge of options, but if you want to buy 21 contracts at $25.70 each, you are looking at 25.70*100*21, or $53,970, not $5,270. At most, you can afford 2 contracts in this case. I think you need to look into time value of options, and realize the price of a $520 Feb. call isn't $2.48 when the stock is $522.48, it's actually $25.70. If time value were zero, the example might work as you state. However, it is simply not.

Using your example:
Acct 1: Buy 2*$520 calls @25.70 ($5140) Sell 2*$525 calls @23.20 ($4640)
Acct 2: Buy 2*$525 calls ($4640) sell 2*$520 calls ($5140)

Let's say Apple ends at $525.
$520 calls are worth $5*100*2 = $1000
$525 calls are worth $0

Account 1:
Transaction 1: Buying $520 calls: pay $5140, final value $1000 = net $4140 loss
Transaction 2: Shorting $525 calls: Get $4640, cover for $0 = net $4640 gain
Total: Net $500 gain
Account 2:
Transaction 1: Buying $525 calls: Pay $4640, final value $0 = net $4640 loss
Transaction 2: Selling $520 calls: Get $5140, cover for $1000=net $4140 gain
Total: Net $500 loss

So you have $5000 and $6000 now in your accounts. This has nothing to do with any price fluctuations that you keep mentioning.

DShaw94 said:   I don't buy it. If the IRS starts out by looking at your aggregate Roth contributions, regardless of the number of accounts, then they're gonna do the same thing for gains/losses,regardless of the number of accounts. The logic of 'wiping out excess contributions with losses' will likely be applied on an aggregate basis, for the period the account was overfund. Example:
Roth IRA contributionsacct#1: $5,500
Roth IRA contributionsacct#2: $5,500
Gain Acct#1: $15,000
Loss Acct#2 ($5,500)
Total IRA account aggregate: $20,500
Total Gain/Loss for period: $9,500
Total Excess contributions for period: $5,500
Total Excess Gain/Loss for period: $4,750

So to avoid penalties for excess contributions, you're going to have to remove $10,250 from Acct#1 before the period end. I mean, if you have 100 Roth IRA account it's going to create an accounting quagmire for the IRS to unravel but I think that's what they'll do. Directing your losses into separate accounts from your gains, shouldn't change your overall taxable or tax-exempt numbers. That's what they were trying to do at Enron with those SPE's at the end of every period, to manipulate their Net Income.

Opinions?
You'd think so, but because it's often difficult or impractical to assess the value of all IRA's at a single point in time, they allow you to use the gains or losses from just the single account from which you withdraw the "excess contribution"; probably on the assumption that not many people will contribute to more than one IRA in a single year. So by exploiting this loophole, theoretically one could sneak unlimited amounts of cash into a Roth IRA.

IRS pub 590 said: "You can take into account any loss on the contribution while it was in the IRA when calculating the amount that must be withdrawn. If there was a loss, the net income you must withdraw may be a negative amount.

In most cases, the net income you must transfer will be determined by your IRA trustee or custodian. If you need to determine the applicable net income you need to withdraw, you can use the same method that was used in Worksheet 1-3, earlier.
"
Notice how they say nothing about treating multiple IRA accounts being treated as a single, aggregated IRA. Worksheet 1-3 also talks about "the IRA", indicating the single account, not the total value of multiple accounts.

mistadeal said:   
I'm not trying to give you a hard time here, but your examples are really off. I don't know if it's chalked up to human error or incorrect/lack of knowledge of options, but if you want to buy 21 contracts at $25.70 each, you are looking at 25.70*100*21, or $53,970, not $5,270. At most, you can afford 2 contracts in this case. I think you need to look into time value of options, and realize the price of a $520 Feb. call isn't $2.48 when the stock is $522.48, it's actually $25.70. If time value were zero, the example might work as you state. However, it is simply not.

Using your example:
Acct 1: Buy 2*$520 calls @25.70 ($5140) Sell 2*$525 calls @23.20 ($4640)
Acct 2: Buy 2*$525 calls ($4640) sell 2*$520 calls ($5140)

Let's say Apple ends at $525.
$520 calls are worth $5*100*2 = $1000
$525 calls are worth $0

Account 1:
Transaction 1: Buying $520 calls: pay $5140, final value $1000 = net $4140 loss
Transaction 2: Shorting $525 calls: Get $4640, cover for $0 = net $4640 gain
Total: Net $500 gain
Account 2:
Transaction 1: Buying $525 calls: Pay $4640, final value $0 = net $4640 loss
Transaction 2: Selling $520 calls: Get $5140, cover for $1000=net $4140 gain
Total: Net $500 loss

So you have $5000 and $6000 now in your accounts. This has nothing to do with any price fluctuations that you keep mentioning.


All of the transactions are call spreads. When you buy a 520 call you sell a 525 call at the same time so you're only paying the difference. That's how quotes on spreads work. You don't just look at one leg of the transaction because you have to do both simultaneously. I've already done the math which I am positive is correct.

Can you do this if you are over the income limit for Roth? Do it using non-deductible traditional IRAs? Which you could then rollover?

You will almost guarantee an audit from the IRS with this strategy. First, every regulated IRA custodian is required to file a 5498 on an annual basis to report contributions. When you remove an 'excess contribution' and file the paperwork with your custodian, they don't simply skip over their filings. If the IRS receives multiple 5498 and addendums from various custodians for the removal it is going to raise the red flags.

As for tolamapS's comment. You have to remember- before Facebook and Microsoft became public they were privately held company. Many custodians do not allow private equity trading through IRAs or what the industry terms as "alternative assets". You need to find a self directed custodian to who will accept this type of asset through a retirement account. To dive into more specifics, Mark Zuckerberg probably draws a salary from his employment from Facbeook. If his IRA invests in the company, he cannot benefit from his IRA's investment. An IRA owner is a disqualified persons and if he draws a benefit from an investment from his IRA, the IRS could deem the investment a prohibited transaction and the whole IRA becomes disqualified. These types of investments usually involve an ERISA attorney

The principle is the same even if one account doesn't double and the other doesn't go to zero. If one gains 20% and the other loses 20% you still end up with $6600 in one account. You just get more contributions returned from the losing one.

It could be as simple as buying FAS in one and FAZ in the other.

cheezedawg said:   It could be as simple as buying FAS in one and FAZ in the other.
They can both go down over any time frame longer than a day, and often have. Trading futures or option spreads is probably a better idea.

FAS vs FAZ

Yeah I guess that was too easy

tolamapS said:   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.


Some people did do this. Reason there are a significant $xxx,xxx,xxx Roths in the country.

TravelerMSY said:   codename47, there's a whole list of family members that count as disqualified persons. Better stick with the friend.
Brothers & sisters aren't on that list of DQs

Holy crap! Even if this eventually gets called out by the IRS, it is still a pretty genius scheme. The way you explained it seemed like March Madness, though. Maybe we can have our own "March Madness" thread where we do this as an exercise, on paper of course. Genius.

What about using this technique to lower/avoid taxes on IRA conversions. Ie. invest in a losing trade in your Trad. IRA And simultaneously a mirror image winning trade in your Roth IRA.

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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