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retirement strategy idea
Old 12-05-2010, 12:47 PM   #1
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retirement strategy idea

My wife and I are working toward ER and are saving every penny possible. Currently 40, and hope to retire before 48. We are not eligible for Roths, however since my wife did not have a traditional IRA, I am putting $5000 in a non-deductable IRA for her and immediately rolling it over to a Roth with no taxes due. I have done this now for her in 2009 and 2010 (and rolled the $10K over to a Roth in Jan 2010). For me, I have a traditional IRA with all capital gains currently worth $60K. At the start of 2010 it was worth $17K, and I should have done a Roth conversion then, but I was stupid. Now I would owe $20K in taxes if I rolled over the entire amount, and this makes it hard for me to do what my wife is doing (putting $5K in a Roth each year tax free).

So...enough of the short background. Since I like gambling a bit with my IRA (it started off at $1700 10 years ago and has had no additional contributions), I am now thinking about rolling over perhaps $10K a year into a Roth and then investing that 10K in my ultra high risk/high return portion of our portfolio. For instance, I am currently holding 100 contracts for Jan 2011 msft $26 calls purchased several days ago for $0.49, and now trading at $1.50 (don't ask me how they ever got so low, but I jumped on it). If I had rolled over $5,000 into a Roth and then purchased these calls with it, I would be sitting on a $15,000 Roth (if I sold now) with only taxes due on $5000.

Now here is the neat part. If a high risk play doesn't work out, then I recharacterize the Roth back into the IRA, and the government "shares" the loss with me. So essentially I only pay tax on those investments that take off, and pay no tax on the ones that fail.

Example:

$5000 invested in tech company 1: fails, goes to $0
$5000 invested in tech company 2: fails, goes to $0
$5000 invested in biotech1: fails, goes to $0
$5000 invested in biotech2: works, goes to $20,000

I recharacterize the first 3 failed investments and end up with a Roth rollover of $20,000 with a tax due on only $5000 from the 4th investment that succeeded. I then invest the Roth semi-conservatively (a large cap index fund or something) so it should never go to zero.

Any chance this would work out ok?
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Old 12-05-2010, 08:52 PM   #2
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Originally Posted by 79protons View Post
We are not eligible for Roths, however since my wife did not have a traditional IRA, I am putting $5000 in a non-deductable IRA for her and immediately rolling it over to a Roth with no taxes due.
I understand doing that in 2010 since the income limitation was removed. But if you weren't eligible for a ROTH in 2009, how did you move funds from a T-IRA to a ROTH? I'm obviously missing something.
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Old 12-05-2010, 09:08 PM   #3
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Originally Posted by walkinwood View Post
I understand doing that in 2010 since the income limitation was removed. But if you weren't eligible for a ROTH in 2009, how did you move funds from a T-IRA to a ROTH? I'm obviously missing something.
I started her T-IRA late Dec 2009 with $5000, then in early Jan 2010 contributed another $5000 and immediately rolled over the $10K into a Roth using the 2010 rules. The money i put in in Dec 2009 didn't have a chance to make interest (well it earned like $0.20 in a money market), so there was no tax due.
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