Could you do this:
1) Convert $100,000 from traditional to Roth IRA 2) Place half the money in each of two separate accounts, designed to be very volatile and highly inversely correlated. 3) Assume you can do this perfectly with no risk, such that you can be assured one account goes to $100,000 and the other to zero. You now recharacterize the account that went down.As a result, you convert $100,000 in assets but pay tax on only $50,000.
See the answer (Yes) and other strategies here:
Why not just convert 50,000 to a Roth IRA, watch it go to 100,000, keep the other 50k in the traditional IRA. You now have 100k in roth,
50k in traditional -- which is better than your scenario of just 100k in roth.
Yes Hank, that strategy can work. rg - because Hank identifies two volatile stocks and doesn't know which one doubles and which goes to zero. Joe
How is this different from a straddle? The courts have determined that doing this kind of thing at the end of one fiscal year to shift income to another fiscal year is a collapsable transaction, and as a result not a valid one.
As I understand a straddle, it consists of two opposite positions in the same underlying security. If IRAs permitted you to be short (hmmm, there are ETFs that are just that, I'll get back to this) it might trip this as a disallowed strategy, but the intention here is to find highly non-correlated or negatively correlated securities. If the positions are all long, I think the strategy is allowed, and could work.
Your point is well taken. The logical extreme would be to buy an ETF and its inverse, in which case your risk is only the tracking error. I'd wonder if this would be the subject of a ruling disallowing.
That said, I still wonder where the line is drawn. If we agree my ETF example is one extreme, what of the advice to simply divide the IRA by ten and convert to 10 roths by asset class or stock and recharacterize the ones that are down? In hindsight, you'd find one account "really up."
Joe
You're right, you might find one that was "really up" but then you have only gained to the extent that you had gains on 10% of your portfolio.
I've done a little poking around. In theory you can do what's called a "collar" - buy stock, sell calls, sell puts - but I don't think you can sell options naked in an IRA, so the account where you are selling the puts would be prohibited. I think you might be able to do it with a 3x leveraged long index ETF in one account and 3x leveraged short ETF in another, but I've seen some suggestions that because of rebalancing, the positions won't entirely offset. It does also occur to me that for the period of time you are doing this, you are not making any market gains. In other words, if you expect (say) 10% appreciation on your position if you just buy-and-hold, you are giving up that possible gain while you have the offsetting long/short positions.
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