8 ms·

"so you've got a way to transmit money from a "sucker fund" to a "winner's fund" with plausible deniability" I've been thinking about this actually for quite a

"so you've got a way to transmit money from a "sucker fund" to a "winner's fund" with plausible deniability" I've been thinking about this actually for quite a while, on a small-time scale. Consider the following scenario: 1. You have a fair amount of money in a Roth IRA, and roughly the same amount of money in a taxable account. 2. The limit on contributions per year is like $6K, and even if you put money in a 401K and then convert whenever possible, that's limited to $19K/yr I think. How can you work around this? 3. Let's assume you're approved for options in your taxable account; and my understanding is that you can buy options in a Roth account - you just can't write them. 4. So, what if you create a synthetic long position by purchasing calls on a broad market fund in the Roth, and selling cash-secured puts on the same fund in the taxable account. And maybe buy some short term corporate debt fund in the Roth to make up for the missing dividends. Not sure if you could also earn some interest on the taxable side. If the stock market goes up in the long run, then you have most of your gains tax-free in the Roth, and minimize your taxable gains. If the stock market goes down for a while, you have most of your losses in the taxable account, and minimal losses in the Roth. 5. I think there are some practical problems, but Matt Levine could probably write about them much more engagingly than me, particularly after someone tries this and gets in trouble for it.

thoughtstheseus 7y ago
This is called asset location. Structure where your investments are located to maximize returns.
- DrAwdeOccarim 7y ago
  Right, I didn't think what he was describing was all that risque. What I'm trying to figure out is if there is a way to sell a cash-secured put on a way OTM option from the IRA then buy that put in the taxable account. Then let it expire worthless. Could that transfer money into the IRA and nab a tax loss deduction in the taxable account?
  - scottjg 7y ago
    perhaps it's possible through enough layers of indirection to create plausible deniability... but generally this type of transaction would be considered self-dealing, which is illegal.
    - perl4ever 7y ago
      How would you even do it, as a nobody with no connections? You have two accounts and your broker isn't linking them up for you. Making a sham trade at an arbitrary price with yourself is not what I was describing. My idea was the calls and the puts are as close to at the money as possible, and the counterparties are just random people with no pre-arrangement. If you're going to simply do fraud, then the constraints don't seem interesting to me.
      - thoughtstheseus 7y ago
        Not directly related but if you create synthetic positions, say you use derivatives to exit a position while still holding the asset you’re supposed to report it as a sale for tax purposes. Complex positions often are not perfectly hedged sometimes to prevent this as the tax benefit exceeds the risk.
  - MR4D 7y ago
    The problem is that you get into wash sale rules [0]. Most people are not aware of this, but wash sales can be impacted by securities owned in retirement accounts [1]. Worse, the aspect of options and "substantially similar" securities starts to get arcane fast. Meaning, you really want a tax lawyer involved on a complex transaction like that. Otherwise, you may find that you've apparently made a ton of money, and then a few years later the IRS knocks on your door and asks for all your profits in a nice check paid to US Treasury. (I'm not saying you can or cannot do this, only that the tax law gets complicated fast.) [0] - (page 56) - https://www.irs.gov/pub/irs-pdf/p550.pdf https://www.irs.gov/pub/irs-pdf/p550.pdf [1] - https://www.irs.gov/pub/irs-drop/rr-08-05.pdf https://www.irs.gov/pub/irs-drop/rr-08-05.pdf ======= EDIT - meant to add that "sale or other disposition" includes the expiration of an option. So you don't actually have to sell to incur the wash sale situation.

thoughtstheseus 7y ago

This is called asset location. Structure where your investments are located to maximize returns.

DrAwdeOccarim 7y ago
Right, I didn't think what he was describing was all that risque. What I'm trying to figure out is if there is a way to sell a cash-secured put on a way OTM option from the IRA then buy that put in the taxable account. Then let it expire worthless. Could that transfer money into the IRA and nab a tax loss deduction in the taxable account?
- scottjg 7y ago
  perhaps it's possible through enough layers of indirection to create plausible deniability... but generally this type of transaction would be considered self-dealing, which is illegal.
  - perl4ever 7y ago
    How would you even do it, as a nobody with no connections? You have two accounts and your broker isn't linking them up for you. Making a sham trade at an arbitrary price with yourself is not what I was describing. My idea was the calls and the puts are as close to at the money as possible, and the counterparties are just random people with no pre-arrangement. If you're going to simply do fraud, then the constraints don't seem interesting to me.
    - thoughtstheseus 7y ago
      Not directly related but if you create synthetic positions, say you use derivatives to exit a position while still holding the asset you’re supposed to report it as a sale for tax purposes. Complex positions often are not perfectly hedged sometimes to prevent this as the tax benefit exceeds the risk.
- MR4D 7y ago
  The problem is that you get into wash sale rules [0]. Most people are not aware of this, but wash sales can be impacted by securities owned in retirement accounts [1]. Worse, the aspect of options and "substantially similar" securities starts to get arcane fast. Meaning, you really want a tax lawyer involved on a complex transaction like that. Otherwise, you may find that you've apparently made a ton of money, and then a few years later the IRS knocks on your door and asks for all your profits in a nice check paid to US Treasury. (I'm not saying you can or cannot do this, only that the tax law gets complicated fast.) [0] - (page 56) - https://www.irs.gov/pub/irs-pdf/p550.pdf https://www.irs.gov/pub/irs-pdf/p550.pdf [1] - https://www.irs.gov/pub/irs-drop/rr-08-05.pdf https://www.irs.gov/pub/irs-drop/rr-08-05.pdf ======= EDIT - meant to add that "sale or other disposition" includes the expiration of an option. So you don't actually have to sell to incur the wash sale situation.