Transferring Funds via Net Zero Transaction

[crs223]

I’d like to transfer funds from a self directed 401k into a Roth IRA.  Who wouldn’t?

 

Can I sell a high interest bond in one and buy the same bond in the other?  Or some equivalent with options?

 

Maybe some strategy where there’s a 90% chance funds will flow one way, and a 10% chance it will go backwards?

[Red Lion]

I think you could almost certainly accomplish this by selling overpriced illiquid options in your ROTH IRA and buying them in the 401k. Maybe cash secured puts. 

 

But I am also pretty sure this is tax fraud and could get you in huge trouble if you got caught. If you are trading between a 401k and a Roth with a 90% chance the Roth wins then I suspect that would not pass the smell test at the IRS if you happened to draw the short straw. 

[bizaro86]

I got a pretty grumpy letter from IBKR compliance when I traded between two accounts I control there. It wasn't anything nefarious for taxes or painting the tape - I needed to raise cash in my non-reg to withdraw but wanted to keep the position so I traded it over to my reg where I had excess cash. In retrospect I should have used something more liquid (this was low volume option position) where both trades would have been with another counterparty.

 

If you want to pursue this, I'd use non-identical securities. Ie buy a $55 call in one account and sell a $57.50 call in the other or something like that. 

 

Or buy covered calls in one and sell naked puts in the other, equivalent but not identical.

Edited December 3, 2022 by bizaro86

[bizaro86]

As a similar aside, I'd love a pair of securities where 1 side went up by 100% and one side went down by 100% for tax efficiency reasons. 

 

Harvest a capital loss on the down side, and donate the appreciated side to charity in place or my normal giving (which doesn't attract cap gains tax in Canada).

[aws]

There used to be a great opportunity with Roth conversions and recharacterizations. You could make a number of Roth conversions from your pretax accounts, make a bunch of risky and perhaps opposing bets, and then undo the losers and only keep and pay tax on the winners. I did this a lot until the Trump tax bill did away with the loophole.

 

To my knowledge you can still effectively do the same thing by making excess annual contributions, but it's more questionable for sure. In theory you could open any number of Roth IRAs and contribute the annual limit to each. You would be penalized for doing so, but not if you remove the excess contribution by the due date of your tax return. Removing the excess contribution causes them to close the account and return whatever is left. You pay tax and penalties on profits but losses just vanish into thin air.

 

So if you had say 2 new accounts and took opposite positions that were effectively binary, one would go to zero and one would double. You then file the form to return the excess contribution on the broke account and keep the winner. You effectively just doubled the allowable annual contribution. And then you could repeat as many times as you dare.

 

Short of that questionable play there really isn't any way I know of to accomplish what you want. Obviously you cannot do something like trade against yourself with illiquid securities to deliberately lose money to the IRA. And if you thought you had some surefire wager that would have a 90% chance of making money for the Roth, you would just make that bet by itself instead of messing around with trying to do an opposing bet on another account.