I have been running some numbers based on Friday's closing price of Apple and I think I have a 100% safe way to convert $20,000 IRA to a Roth while only paying taxes on about $10,000 of it. This is kind of wacky, but here goes:
Using the options pricing at friday close:
Roth conversion account #1 $10,000 start
Sell 40 AAPL April 11 $325 calls for $20.45
Buy 40 AAPL April 11 $330 calls for $17.90
Net credit $10,200. Max loss $9800
Roth conversion account #2 $10,000 start
Sell 37 AAPL April 11 $325 puts for $17.95
Buy 37 AAPL April 11 $320 puts for $15.60
Net credit $8695. Max loss $9805
Scenarios
Apple closes below $320: Roth 1 worth $20,200, Roth 2 worth $195
Apple closes above $330: Roth 1 worth $200, Roth 2 worth $18,695
Apple closes between $320 and $330: Both Roths worth something, at magic number of $325 combined Roths worth $38,895 In this unlikely case, you would end up not saving any taxes, but then again, you have almost a 100% return.
Figure trading fees would be around $100 for each account. In a 28% tax bracket, you would pay $2800 in federal tax for the "good" account and recharacterize the one that lost back to IRA and pay no tax. If you had just done the conversion straight up, you would pay $5600 in tax. For the worst case of Roth 2 being the winner, you end up with a $18595 IRA for $2800 in taxes vs a $20,000 IRA for $5600 in taxes. If you back out the loss in the option play, you still are $1400 ahead.
Crazy? Seems foolproof, which makes me think it is foolish.
Using the options pricing at friday close:
Roth conversion account #1 $10,000 start
Sell 40 AAPL April 11 $325 calls for $20.45
Buy 40 AAPL April 11 $330 calls for $17.90
Net credit $10,200. Max loss $9800
Roth conversion account #2 $10,000 start
Sell 37 AAPL April 11 $325 puts for $17.95
Buy 37 AAPL April 11 $320 puts for $15.60
Net credit $8695. Max loss $9805
Scenarios
Apple closes below $320: Roth 1 worth $20,200, Roth 2 worth $195
Apple closes above $330: Roth 1 worth $200, Roth 2 worth $18,695
Apple closes between $320 and $330: Both Roths worth something, at magic number of $325 combined Roths worth $38,895 In this unlikely case, you would end up not saving any taxes, but then again, you have almost a 100% return.
Figure trading fees would be around $100 for each account. In a 28% tax bracket, you would pay $2800 in federal tax for the "good" account and recharacterize the one that lost back to IRA and pay no tax. If you had just done the conversion straight up, you would pay $5600 in tax. For the worst case of Roth 2 being the winner, you end up with a $18595 IRA for $2800 in taxes vs a $20,000 IRA for $5600 in taxes. If you back out the loss in the option play, you still are $1400 ahead.
Crazy? Seems foolproof, which makes me think it is foolish.