Tax-free Roth conversion (but with market risk)…?
I’m wondering if I might have discovered a tax-free means of converting TIRA money into Roth money. If I expect a down market direction and invest $1000 from my TIRA account in SPY (S&P index ETF), and also invest $1000 from my Roth account in SH (inverse fund of S&P index), and my market opinion is correct, I will be transferring any change in the market from the TIRA account to the Roth account. These two ETFs move very closely in opposite directions.
Does the IRS have any rules against a strategy like this….?
Permalink Submitted by Bruce Steiner on Mon, 2012-07-16 03:06
What if the market goes the other way?
Permalink Submitted by Alan Spross on Mon, 2012-07-16 03:17
No rules against it.
If the S&P drops 5%, your Roth will gain 5% and your TIRA will lose 5%. This is the same as converting SPY shares but without the tax bill. The only gain is the tax savings.
But if the market gains 5% instead, the reverse happens. Your Roth takes the loss and your TIRA gains 5%. After that if you converted the SPY, you would owe taxes on the conversion. In this case, you would be back where you started and the only loss is the tax bill on the conversion.