Can you avoid capital gains with an IRA

[Bossman]

Hey all,

Let's say you "accidentally" deposit 50-100K into either a Traditional or ROTH IRA at the beginning of the year. Then use that money to day-trade and make a few thousand (or more) dollars in gains. Before, the end of the year, then the original 50-100K is withdrawn in addition to any gains.

Is the maneuver above legitimate and would it successfully avoid any capital gains tax? Thanks for any input.

Bossman (and day-trader)

 

[cathy63]

No reputable broker should accept a deposit into an IRA or Roth IRA greater than the maximum annual contribution, so the most you could "accidentally" deposit is $6K ($7K if over age 50).

If you do this, then when you withdraw the gains they are taxable as ordinary income, so you don't gain anything.

 

[njhowie]

Not legitimate, will not avoid taxes, and would very likely lead to an audit.

 

[pb4uski]

No reputable broker should accept a deposit into an IRA or Roth IRA greater than the maximum annual contribution, so the most you could "accidentally" deposit is $6K ($7K if over age 50).

If you do this, then when you withdraw the gains they are taxable as ordinary income, so you don't gain anything.

+1 even if you could find a broker who would do it the increase in value would be ordinary income, which is taxed higher than capital gains... also, the gains would be short-term capital gains and would be taxed as ordinary income anyway... so you will have accomplished absolutely nothing other than increasing your IRS audit risk.... dumb idea.

 

[jazz4cash]

Capital Gains rates are less than ordinary i come rates, so how would this help even if you could do it?

 

[Bossman]

At any time, one can transfer from one IRA account to another with no limit to the amount, so I do not believe that Fidelity would question me adding money to my IRA account. Regardless, doing what I proposed has more risk than benefit, so this thread can be closed.

 

[disneysteve]

At any time, one can transfer from one IRA account to another with no limit to the amount, so I do not believe that Fidelity would question me adding money to my IRA account.

There is a big difference between a rollover and adding new money.

 

[Bryan Barnfellow]

Remember the IRS rule on taxes: You can avoid but you can not evade.

-BB

 

[RunningBum]

Anytime I've accidentally gone over a contribution limit on a tax advantage account, or intentionally converted more to a Roth (remember the Roth conversion horse race days?), when I've undone the transaction the holding company always figured out how much that amount made while in the account and withdrew that as well. If it was returned to a taxable account, the extra amount was taxed. I didn't specifically do what OP was considering, but I have no doubt that it would be taxed when undone. You would gain no advantage, and just cause extra work for yourself and the holding company.

 

[njhowie]

At any time, one can transfer from one IRA account to another with no limit to the amount, so I do not believe that Fidelity would question me adding money to my IRA account. Regardless, doing what I proposed has more risk than benefit, so this thread can be closed.

Yes, Fidelity would allow that, but at the time you would have to tell them it is a transfer/rollover so they can indicate it appropriately, specifically for tax purposes. Now, while going through that, you are way, way beyond an "accidental" deposit.

 

[pb4uski]

+1 if you indicate it is a rollover and it is not a rollover, that could be interpreted as fraud.