Funneling money from a Traditional IRA to a Roth IRA using Options: Is my method possible and tax legal?
"I am not a lawyer, but I can't think of a reason this is illegal (something that would be illegal would be to ""trade with yourself"" across the accounts to try to manipulate stock or option prices). I don't think you're ""funneling,"" you're doing ""asset location"" which is a standard tax planning strategy. http://news.morningstar.com/articlenet/article.aspx?id=154126&t1=1303874170 discusses asset location. I'd be more concerned about whether it makes sense." I am not a lawyer but I do not see a legal problem here. However, if the puts in the Roth IRA are not purchased at fair market value that could be a problem. For example, if your traditional IRA sold puts to the Roth IRA below fair market value that would not be allowed. However, from your post, it appears that you will be buying the puts from a third party so that will not be an issue. There is something else that just cross my mind. Imagine that you own 100 shares of the XYZ stock in your traditional IRA and 100 shares of the XYZ stock outside of an IRA. Now, you buy a put on the XYZ stock inside your Roth IRA. Are the dividends on the XYZ stock still qualified? I do not know but my guess is the answer is no.
"The most common use of non-deductible Traditional IRA contributions these days, as JoeTaxpayer mentioned, is as an intermediate step in a ""backdoor Roth IRA contribution"" -- contribute to a Traditional IRA and then immediately convert it to a Roth IRA, which, if you had no previous pre-tax money in Traditional or other IRAs, is a tax-free process that achieves the same result as a regular Roth IRA contribution except that there are no income limits. (This is something you should consider since you are unable to directly contribute to a Roth IRA due to income limits.) Also, I want to note that your comparison is only true assuming you are holding tax-efficient assets, ones where you get taxed once at the end when you take it out. If you are holding tax-inefficient assets, like an interest-bearing CD or bond or a stock that regularly produces dividends, in a taxable account you would be taxed many times on that earnings, and that would be much worse than with the non-deductible Traditional IRA, where you would only be taxed once at the end when you take it out." "no, good questions my friend.  when did you do this rollover? if it was this year, your firm should have forms that you can fill out to ""undo"" the roth conversion - only earnings on your investments will be taxed, and everything gets rolled over to a traditional IRA. not fun for tax filing but...  you can also leave them as is and pay the taxes (usually only a good option if it's a low income year for the filer).  i would consult your tax advisor regardless in this situation." To your question. Yes. What you propose is typically called the back door Roth. You make the (non-deductible) IRA deposit, and soon after, convert to Roth. As long as you have no other existing IRA, the process is simple, and actually a loophole that's still open.  If you have an existing IRA, the conversion may be partially taxed based on untaxed balance. As comments frequently get overlooked, I'm adding @DilipSarwate excellent warning regarding this - Depending on the value of the existing Traditional IRA and its   pre-existing basis, if any, the backdoor Roth conversion might be    almost completely taxable. Example: Traditional IRA worth $250K with    zero basis. New nondeductible contribution increase value to $255.5K    and basis $5.5K. Converting $5.5K into a Roth IRA leaves $250K in the   Traditional IRA with basis $5381.60. That is, of that $5500    conversion, only $118.40 was nontaxable and so, not only is the    original $5500 taxable income to the OP but he also owes taxes on    $5381.60 of that $5.5K conversion. In short, discussions of backdoor Roth conversions as a great idea should always be tempered with an acknowledgement that it does not work very well if there is any other money in the Traditional IRA. Once that nondeductible contribution enters a Traditional IRA, it does not come out completely until all your Traditional IRA accounts are drained of all money. All your Traditional IRA money is considered by the IRS to be in a single pot, and you can't set up a Traditional    IRA (possibly with a new custodian) via nondeductible contribution, convert just that Traditional IRA account into a    Roth IRA account, and claim that the whole conversion amount is nontaxable because all the tax-deferred money is in the other IRAs that you haven't touched at all. Last - you disclosed that you are depositing to a Roth 401(k) to the match. Which prompts me to ask if this is best. If your marginal rate is 25% or higher, you are missing the opportunity to save 'off the top', at that rate, and 'fill the lower brackets' at retirement, or, via conversion, any year before then when you are in a lower bracket for whatever reason. See my answer for Saving for retirement: How much is enough? which addresses this further.  From new comments - Won't his Roth 401k contributions max out his overall Roth   contributions? No. They are separate numbers, each with own annual limits. Wouldn't this prevent any back-door Roth conversions? The 401(k) has no effect on back door Roth, except for the fact that the 401(k) and high income make the Roth IRA unavailable by normal deposit. Back door is the only door.  At the end are you encouraging him to look for a Traditional 401(k) at   work to max out, then contributing to a Roth? Yes! Read the linked SE article, and consider the annual withdrawal that would get you to 25%. As I wrote, it would take $2M+ to 'fill' the 15% bracket at retirement. I'm not sure why you want to put this into a traditional IRA.  Variable annuities are already tax-deferred so you're not gaining any tax advantage there. Depending on your tax situation you could claim a loss if you sell. In the same way that you are taxed on the actual amount of money you convert from the Traditional IRA to the Roth IRA -- rather than on the amount of money that you initially contributed to your 401(k) or on the amount of money that you rolled over to your Traditional IRA -- that converted amount becomes the contributions to your Roth. So (3) is the correct answer. It doesn't matter how you accumulated the money in the first place; as long as the IRS has had the opportunity to dig their claws into it, it counts as a contribution to your Roth. Read the Forbes article titled IRA Adventures. While it's not the detailed regulations you certainly need, the article gives some great detail and caution. You may be able to do what you wish, but it must be structured to adhere to specific rules to avoid self dealing. Those rules would be known by the custodians who would help you set up the right structure, it's well buried within IRS regs, I'm sure. Last, in general, using IRA funds to invest in the non-traditional assets adds that other layer of risk, that the investment will be deemed non-allowed and/or self-dealing. So, even if you have the best business idea going, be sure you get proper council on this. Nice idea. When I started my IRAs, I considered this as well, and the answer from the broker was that this was not permitted. And, aside from transfers from other IRAs or retirement accounts, you can't 'deposit' shares to the IRA, only cash. In the US, it is perfectly legal to execute what you've described. However, since you seem to be bullish on the stock, why sell? How do you KNOW the price will continue downwards? Aside from the philosophical reasoning, there can be significant downside to selling shares when you're expecting to repurchase them in the near future, i.e. you will lose your cost basis date which determines whether or not your trade is short-term (less than 1 year) or long-term. This cost basis term will begin anew once you repurchase the shares. IF you are trying to tax harvest and match against some short-term gains, tax loss harvesting prior to long-term treatment may be suitable. Otherwise, reexamine your reasoning and reconsider the sale at all, since you are bullish. Remember: if you could pick where stock prices are headed in the short term with any degree of certainty you are literally one of a kind on this planet ;-).  In addition, do remember that in a tax deferred account (e.g. IRA) the term of your trade is typically meaningless but your philosophical reasoning for selling should still be examined. You cannot just transfer or rollover from a traditional to a Roth IRA, because they are taxed differently.  You'd have to do a distribution from your traditional (which will be taxed and possibly penalized, depending on your income and age), and a contribution to your Roth (which is limited based on annual contributions to all your IRAs). A conversion is not limited by dollar amount (unless you must take an RMD... required distributions may not be converted).  There is no income limit for 2010 and beyond (previously $100k MAGI), and there are no penalties.  However, all you must pay tax on all untaxed dollars - this means the original contributions as well as the growth. It all depends on the size of your IRA, your investment options, and your expected tax bracket at retirement.  Traditional IRA distributions are considered income for the year, while Roth distributions are not. A broker does not have to allow the full trading suite the regulations permit.  From brokersXpress: Do you allow equity and index options trading in brokersXpress IRAs?     Yes, we allow trading of equity and index options in IRAs based on the trading level assigned to an investor. Trading in IRAs includes call buying, put buying, cash-secured put writing, spreads, and covered calls.  I understand OptionsXpress.com offers the same level of trading. Disclosure - I have a Schwab account and am limited in what's permitted just as your broker does. The trade you want is no more risky that a limit (buy) order, only someone is paying you to extend that order for a fixed time. The real answer is to ask the broker. If you really want that level of trading, you might want to change to one that permits it. "Yes, it is possible to withdraw money from your Roth IRA before retirement (but I wouldn't necessarily advise you to do so.)  Here's the good news, and the bad news: The good news: Unlike a traditional IRA, money contributed to a Roth IRA is done so on an after-tax basis, meaning you don't benefit from a tax deduction on contributions. So, the money you withdraw from your Roth IRA will not be taxed entirely as ordinary income. In fact, you are allowed to withdraw the amount of your original contributions (also known as basis) without any taxes or penalties. Let's imagine you originally deposited $9000 of that current $10K total value – then in such a case, $9000 could be withdrawn tax and penalty free. The bad news: When it comes to the investment earnings – the other $1000 in my example –  it's a different story:  Since you wouldn't be age 59 1/2 at the time of withdrawal, any money taken out beyond your original contributions would be considered a non-qualified withdrawal and subject to both ordinary income taxes plus a 10% early withdrawal penalty.  Ouch! Perhaps you might want to restrict your withdrawal to your original contributions.  I would imagine if you've had the account for such a short period of time that much or all of your account value is original contributions anyway. A good article about the rules for early IRA withdrawals is About.com's Tax Penalty for Early Distribution of Retirement Funds. Note: If your Roth IRA funds were the result of a rollover from another account type, other rules may apply. See Roth IRA (Wikipedia) for more detail; search for ""rollover"". Regarding the withdrawal process itself and the timing, you should check with your account custodian on how to proceed." Options are a derivative product, and in this case, derive their value from an underlying security, a traded stock. An option gives you the right, but not the obligation, to buy a stock at a given price (the strike price) by a given time (the expiration date.) What I just described is a call option. The opposite instrument is a put, giving you the right, but not the obligation, to sell the stock at a given price.  Volumes have been written on the subject, but I'd suggest that for a custodial Roth, I'd not activate the ability to trade options.  How to get started with options investing? offers a nice introduction to trading options. In my response, I offer an example of a trade that's actually less risky due to the option component. I have a CPA. They said that it isn't possible. However, I've seen on message boards that it indeed IS possible, multiple times. I'll likely reach out to another CPA. However, I am interested to hear from somebody who has done this before, so that I at least have a name or defined process for what I'm attempting to do. tl;dr: Please please please do the conversion first. JoeTaxpayer's answer is correct, but I am of the opposite opinion. First, there's just about no reason to have post-tax dollars in a Traditional IRA.  You'll eventually have to pay tax on the earnings those dollars generate, so it's essentially the same as having that money in a regular taxable account.  Meanwhile, if you roll those dollars into a Roth IRA, you get to earn tax-free money on them for the rest of your life (and even after your death)! Second, even if you did have some reason for keeping those post-tax dollars where they are, the last thing you ever want to do is mix them with pre-tax dollars (from, say, your 401k).  As soon as you mix them, all the dollars become subject to pro-rata taxation (as Joe mentioned), so any future decision you were planning to make about what to do with just your post-tax dollars is moot -- you have given away your right to think separately about your pre- and post-tax dollars. As an example, let's say the accounts you want to combine look like this: In the future you decide you want to move $2,000 from the above account into a Roth.  Because you mixed the money, the IRS insists that your rollover consists of: So now you owe tax (and it's regular income tax, I believe, not even capital gains tax) on $1,500.  That was money that you socked away specifically to avoid taxes, and now you've gone and paid taxes on it!  Now, there are valid arguments for intentionally moving pre-tax dollars from a Traditional to a Roth like this, but the point is that you shouldn't even have to be having that argument -- you have post-tax dollars in your Traditional IRA that almost certainly belong in a Roth.  By mixing your 401k into your Traditional IRA, you can no longer do anything with just the post-tax dollars.  The IRS will forever insist that you do these pro-rated calculations. Say in the future you suddenly realize that a Roth is much better for your financial situation than a Traditional IRA.  (Or you might still prefer a Traditional IRA, but as explained in the next sentence it's not available to you.)  Unfortunately, because you're covered by a (new) 401k -- or maybe because you earn too much money to contribute pre-tax dollars to either a Traditional or Roth IRA -- you're out of luck.  You're simply not allowed to contribute to a Roth. Most people in this situation can make use of what's called a back-door Roth.  They contribute up to the maximum amount per year ($5,500 or whatever it is now) post-tax to a Traditional IRA and then immediately roll it over to their Roth.  You can still try this, but guess what?  Yep, because you're mixing these new post-tax dollars with pre-tax money in your Traditional IRA, every year your rollover will be tainted with that pre-tax money, diluting the whole point of the back-door Roth.  You'll be paying taxes on money you never wanted to pay taxes on, and you'll be leaving post-tax money behind in your traditional IRA. (If it sounds like I'm annoyed about this situation from personal experience, it's because I am. :) By doing the conversion first, you never mix pre- and post-tax money, and your money goes where you want it. Of course, assuming you eventually do roll over your 401(k) into a Traditional IRA, the Really Annoying Consequence above will still plague you, but at least you'll have cleanly converted that first post-tax amount. By all measures, the U.S. stock market is currently frothy. The apparent stability of the world financial system is superficial – financial asset prices are not real, the equilibrium is temporary, the lack of volatility is a trap, and when the whole thing goes haywire, there will truly be hell to pay.