Buying TSLA in Roth IRA

[deonb]

My MAGI is over the Roth IRA limit, so I've never bothered to research Roth IRA's.

However, I feel strongly that TSLA will grow to at least 10 times it's current value over the next 25 years, so it would be REALLY nice even to even just be able to buy that 5k per year in TSLA (or TSLA leaps) and have it be not be taxed on distribution.

Is there a good way around the MAGI limit? The only deduction I have on MAGI is the Traditional IRA, but that has a $5000 limit. No student or education loans.


Is there any other good techniques out there I can use to qualify for it? (My wife currently does not have an income, but I would definitely not mind if it's in her name. But I think at most you can contribute your own personal income).

(Married Filing Jointly).

 

[astrotoy]

If you have an IRA or can move money from a 401k, 403b or 457 into a rollover IRA, then you can convert the IRA or rollover IRA money into a Roth IRA. You will have to pay tax on the conversion - best to be done with non-IRA funds, but then you have your Roth IRA. You cannot add to the Roth IRA unless you are under the MAGI limit, but if you have a 401k or 403b or 457, then those funds can be rolled over into an IRA then converted to a Roth IRA. We did that with our 401k, 403b and 457 accounts, paid the taxes and now they are growing tax free and can be even included in our estates if we want - with no required minimum distribution at 70 1/2.

Please check with your tax and investment advisors to confirm this.

 

[7racer]

There is still another loop hole you can do if you are above the income requirement. You can contribute the 5500 to a traditional IRA first then roll that directly to a Roth. The IRA money is post tax dollars and you only pay taxes on any gain from the IRA to Roth which should be zero in the direct rollover. The only thing you have to track is you can't touch the 5500 for five years. But that really shouldn't be an issue and when you retire, it will usually just be the last amount you deposited that you have to track.

 

[kenliles]

There is still another loop hole you can do if you are above the income requirement. You can contribute the 5500 to a traditional IRA first then roll that directly to a Roth. The IRA money is post tax dollars and you only pay taxes on any gain from the IRA to Roth which should be zero in the direct rollover. The only thing you have to track is you can't touch the 5500 for five years. But that really shouldn't be an issue and when you retire, it will usually just be the last amount you deposited that you have to track.

Not a tax expert here, but I did an IRA>>RothIRA rollover and I believe you have to pay the tax on the gain while in the IRA. The rollover treated as a 100% withdrawal (taxes due on all gains from basis while in IRA), then on deposit/rollover to RothIRA, the early withdrawal penalty from IRA is waived, but you still have to pay the tax on gains in the IRA per usual. Of course once in the RothIRA all gains are tax free.

 

[7racer]

Correct. But like I said, if you deposit it and roll it over right away to the Roth, there shouldn't be any gains. So each year you can deposit your full amount into the traditional IRA the immediately roll it into a Roth. You don't want to deposit it into the IRA and lump roll it sometime down the road.

 

[7racer]

What you are referencing is the scenario that you have your existing IRA with a lump sum that you are rolling over. What I am talking about is your yearly contributions that you can make into the IRA but immediately roll it into a Roth and get past the income restrictions.

Even though I am a physician, I took 2 years to get a CFP degree. Ask your tax guy or financial planner. They will be able to confirm this.

 

[kenliles]

Well yes, immediate and repeated transfer would on the surface seem to circumvent the intended purpose for IRA conversion to Roth. And if you have no other non-RothIRA monies at all that might work. But that's unusual and all non-RothIRA monies are considered a single non-fungible source of untaxed dollars, even across accounts (likely including 401K accounts)

Before embarking on such strategy, have a look here and definitely consult a tax professional
Warning About Roth IRA Conversions: Often Misunderstood IRS Rule Can Cost You Money and Aggravation - Forbes

"The IRS does not allow converters to specify which dollars are being converted as they can with shares of stock being sold; for the purposes of determining taxes on conversions the IRS considers a person’s non-Roth IRA money to be a single, co-mingled sum.

Hence, if a person has any funds in any non-Roth IRA accounts, it is impossible to contribute to a Traditional IRA and then “convert that account” to a Roth IRA as suggested by various pundits [and the Wikipedia piece referenced]– conversions must be performed on a pro-rata basis of all IRA money, not on specific dollars or accounts."

 

[7racer]

kenliles,

while the article that you linked is correct, he is kinda mixing two issues. As far as the "tax law" goes, you can, as I mentioned above it is currently legal to deposit money into a traditional IRA and then immediately roll it over to a roth. Until they close the loop hole, this will be allowed.

The thing he is saying is if you have what I call "dirty money". So let's say your IRA you currently have is "clean". What I mean by that is that you are above the 68,000 for single filers and 115,000 for married individuals, you can not take a tax deduction on the money. So let's say that is the way things were since you created the IRA. The IRA consist of post tax dollars. It is "clean" because it is simple to deal with because once you convert that lump to a ROTH, you get taxed on the gains and it remains post tax dollars. That is the contribution and gains are post tax dollars. NOW, once you start doing the loop hole, that is, contribute to the IRA and immediately roll it into this Roth. It is still clean, that is post tax dollars on the contributions (no gain during the short time that it was an IRA) and now the gains in the Roth of ALL the contributions grow tax free.

A dirty IRA is something like this and what the article was explaining. Let's say you had an IRA when you were younger and met the income requirement. Let's just say for example that you had 100,000 in this account. Each year you took the income tax deduction for your IRA contribution. When you retire, you get your money taxed on the contribution. But let's say after the 100,000 you made, you roll that lump into an Roth. You get taxed on the gains but your contributions remain tax free. It's a bit more complicated than that but it depends on what your "basis" is. How Much of My IRA Distribution is Taxable?

So in this account you have a portion that is taxable and not taxable (basis and gain). But let's say you take this account and start contributing to the Roth by doing the IRA>Roth trick. That amount is ALL post tax dollars. That is the basis and gain. The account then becomes "dirty" (this is my term and not a financial term). That is you have some basis that is taxable and some not. It become almost impossible to know how much of the basis is or isn't. The way the IRS treats this is simple. They just say it is all taxable. So the benefit you had of having a tax free portion (when you met the income requirement is lost).

But it really shouldn't be that complicated. It's simple to fix this. The way to fix this is to keep track of it your self by...just rolling over that account that had the tax free portion into a roth account and leave that account separate. When you deposit new money that is all post tax dollars (that is clean), do it in a new Roth account...that is don't mix it into the dirty account.

Get it?

 

[kenliles]

I think so, but the reference material say you can't control it by different accounts. The IRS treats all accounts as one source. If any accounts have untaxed gains in them (dirty components), then the conversion (to Roth) amount from any account (clean or not) is assumed to be the as yet untaxed (dirty) money first (and therefore taxed) -repeat until all monies are clean (taxed on Roth entry).

I think what the source is saying is that from IRS perspective ALL untaxed gains earned within ALL non-Roth IRA/401k accounts are the pool from which ANY conversion to Roth comes from first (and as such taxed at the time of conversion). As such, the individual cannot decide which account (basis formed), nor which monies are being converted. In other words, if there are any per-tax,dollars or untaxed gains in any account, those are the dollars that will be assumed converted to Roth and therefore taxed.

That's the way I read it anyway. That the loop-hole doesn't really exist unless you have in fact no untaxed gains or pretax dollars

 

[7racer]

I'll ask my financial planner and accountant again but that is not what I have come to understand.
If they are held in a separate account, one can clearly determine the basis for one account versus another.

Also, I doubt that this would even happen as it would be political fodder if you started taxing peoples Roth IRA on distribution after you promised them tax free distribution.

Finally, how you interpreted it is also why I stated I think he is mixing the two issues. He even qualifies that he isn't a tax accountant. It is true that if you convert those accounts that you mentioned into ONE new account it is treated all the same. This is TRUE. If you create a new Roth IRA account and place money into it by the IRA to Roth method, than this is a separate account with money you placed into account following the IRS rules. The price you pay is holding the money for the "five year test".

This all started when they eliminated the income restriction on conversions. Once this closes up, you will no longer be able to do this.

Even in this article in the section with the question "in your column in January 2010..."
she clarifies this. Stating that you cannot "cherry pick" the money that you convert. That the tax depends on what the ratio of the deductible and non deductible portions are in THAT account.

Finally, like you probably know...tax "law" is complex. Until this gets challenged or goes to a tax court or congress makes a law, it is open to interpretation. Every financial guy I have talked to stated that this is OK and it doesn't change the nature of your IRA or cause your Roth to become taxed later due to the fact that you used the loop hole.

When I asked them (during class) why? Why wouldn't they go after that?
the professor stated
1) they lifted the income restriction for 2010 for conversion so they new this could be an issue.
2) most people who are above the income requirements will not have that much of the % of their portfolio in the Roth, so the "taxable amount" is still relatively small even with the gains that the IRS would probably no bother to go after it
3) it is a political nightmare to start taxing these accounts so most likely no politician will let that happen.

 

[kenliles]

Yeah, thanks for rechecking. Sometimes with IRS there's no definitive answer either.

"Also, I doubt that this would even happen as it would be political fodder if you started taxing peoples Roth IRA on distribution after you promised them tax free distribution."

Yeah, I don't think they would do this either, although in our scenario it gets taxed on the way out of the Tradional IRA, before going into the Roth. Once in the Roth no tax applies. So it happens on conversion, but on the money moving out of the Tradional IRA and on any amounts in any nonRoth account that has not been taxed to date (gains and pretax deposits in the Tradional IRA).

Interesting discussion!

 

[MikeC]

If you do an IRA conversion, you want to be sure you have no other non-Roth IRAs. 401k accounts are ok, so you would want to convert any IRAs you might have.

I made the mistake of contributing $10k to a SEP-IRA last year after I did a conversion BUT before December 31, 2012. Turbotax asked for the balance in all non-Roth accounts on the last day of the year and based on that stupid $10k, I ended up paying an extra $1k in federal tax. I forget how the math went, but that was the net result.

-------

Update:

Actually, I think the math was like this:

5000 converted / 15,000 total contributions = 33%

10,000 left in account * .33 * ~.30 tax rate = ~1k

 

[kenliles]

If you do an IRA conversion, you want to be sure you have no other non-Roth IRAs. 401k accounts are ok, so you would want to convert any IRAs you might have.

I made the mistake of contributing $10k to a SEP-IRA last year after I did a conversion BUT before December 31, 2012. Turbotax asked for the balance in all non-Roth accounts on the last day of the year and based on that stupid $10k, I ended up paying an extra $1k in federal tax. I forget how the math went, but that was the net result.

-------

Update:

Actually, I think the math was like this:

5000 converted / 15,000 total contributions = 33%

10,000 left in account * .33 * ~.30 tax rate = ~1k

Yep, that's what I was afraid of. Good to know the 401k isn't considered