Yup. Converting to a Roth also has the downside of being able to buy fewer shares after the transfer.
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Tax discussion, strategies and questions
- Thread starter clp1
- Start date
Yes, I have that issue…….it is tough figuring out how to minimize the tax hit as opposed to trying to figure out how to pay the bills in retirement /s
Jetpad
Member
I've thought about that but it seems like if you have $100,000 IRA and convert it with an example of a 33% tax rate and then invest the resulting $66,000 in a Roth, you'll have a 1/3 less (but tax free) at the end instead of paying that 1/3 in taxes at the end. Seems like you end up with about the same amount of money.
Knightshade
Well-Known Member
Well, that depends- some folks are in a high tax bracket while working, but plan to be in a lower one when they retire.
And the IRA has the benefit of letting you grow that money without constantly being taxed on it (for example folks making weekly $ selling spreads and calls)
As another example- when S&P was announced I sold my shares and bought dozens of January ITM calls which more than doubled the value of the account when I converted back to shares months later. That would've been an insane, short-term-rates, tax bill in a cash account- it was 0 taxes in an IRA.
Did the same during the Feb. dip this year and didn't QUITE double (I converted back a week too early it turns out) but still over 50% gains that aren't immediately taxable as they would be in a cash account.
OT: The big difference is that a Roth isn't subject to RMD's. So you could end up being forced to take large distributions from a traditional IRA that you don't want. (Resulting in a large tax bill.)
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As I remember, If your under 59 1/2 , you will have to pay a 10% penalty on any amounts used for the purpose of paying the tax on the conversion?
If you use part of your IRA to pay tax on the conversion you aren't accomplishing a goal of having the same number of dollars in the Roth. But there other reasons that a conversion might make sense for you (like a great upside in the future value of Tesla shares).
Not advice, your mileage may vary...
Consult a professional before making any changes.
Folks would be wise to do their homework on IRA’s. Examples (I am not an accountant. Please correct me if I am mistaken):
- If you are in a high tax state and may leave for a low tax state, starting with a traditional IRA then rolling over after moving may make sense (Do pay attention to the residency/domicile requirements).
- You have to wait five years after the rollover to access the Roth funds penalty free.
- IRA’s funds do not count towards your assets if you are going for an asset backed mortgage.
- We still have the step-up basis which implies there is little difference between traditional and Roth IRA’s for your heirs (and a rollover would be wasteful).
These are important points. Given the steep rise in the share price and some of the comments, I thought them worth sharing on the main thread.
If one were considering moving back to a high tax state—which one might increasingly do as the SP rises—, looking to finance a home, and have an heir or heirs, the best tax strategy may not be obvious or simple and the timing will matter.
Only if you are <59-1/2 for contributions/ rollover amount. So same penalty as the original IRA but earlier penalty free access.
Earnings cannot be pulled out penalty/ tax free until 5 years and 59-1/2.
Worth the Wait: The Roth IRA 5-Year Rule
If you were 59 1/2 when the rollover occurred, you’d still have to wait the five years. Correct?
The amount you rolled over is penalty free once you are 59-1/2 (just like it would be in the original IRA). Earnings you withdrawl (after all rollover amounts have been pulled out) get taxed for the first 5 years even if you are older than 59-1/2.
Note that for non-rollover Roths, the 5 year timer on earnings starts from the inital contribution.
So I’m mistaken then.
You’re saying that if you were to rollover a traditional IRA to a Roth IRA when you turned, say, 59, you could take distributions from the rolled over funds as soon as you turned 59 1/2?
Do your own due diligence of this, but my understanding is yes, you could pull the rolled over amount out at 59-1/2 penalty free.
For direct contributions: can pull out any time penalty free
For rolled over contributions: penalty free either 5 years after that rollover (each has a 5 yr cool off) or 59-1/2.
For those in the US with assets in pretax IRAs, this is not so simple. Using these assets as collateral for a loan is itself a taxable event against the holdings.Edit: quoting @StrongGuy
You do you, but imo you’re NGMI. Wealthy don’t pay taxes…the ideal holding period for a stock is forever. Borrow against your assets if you need $ for expenses. NFA.
Can Retirement Accounts Be Used As Collateral?
Assuming no other fund available, is this correct:
If you pull money out of an IRA early, you pay income taxes plus a 10% penalty on the withdrawn amount (which is also taxed if you use the IRA for the funds)
t=tax_rate
T=tax
p=penalty_rate
P=penalty
N=net
W=withdrawn
T=W*t
P=W*p
N=W-T-P=W-W*t-W*p=W*(1-t-p)
W=N/(1-t-p)
However, if you convert to a Roth, you only pay taxes:
R=Roth_amount
R=W-T=W-W*t=W*(1-t)
If you then withdraw from the Roth before the 5 year rule is satisfied, you pay a penalty on the amount pulled out:
N=R-P=R-R*p=R*(1-p)
But the Net amount is more than a direct IRA withdrawl (or the initalnwithdrawl needed is less).
N=R*(1-p)=W*(1-t)*(1-p)=W*(1-t-p+t*p)
W=N/(1-t-p+p*t)
The p*t term reduces the amount of inital withdrawal for a specific post tax&penalty amount on hand. The higher the tax rare, the more the impact:
At 37% tax rate (ignoring any state taxes):
IRA: W=N/(1-.37-.1)=1.89*N
Via intermediary Roth: W=N/((1-.37)(1-.1))=1.76*N
For a 1-(.76/.89) = 15% reduction in tax&penalties.
Still 31% worse than waiting out the penalty:
W=N(1-.37)=1.58N
But if one had to access funds soon, it seems a better option.
Or am I missing something?
If you pull money out of an IRA early, you pay income taxes plus a 10% penalty on the withdrawn amount (which is also taxed if you use the IRA for the funds)
t=tax_rate
T=tax
p=penalty_rate
P=penalty
N=net
W=withdrawn
T=W*t
P=W*p
N=W-T-P=W-W*t-W*p=W*(1-t-p)
W=N/(1-t-p)
However, if you convert to a Roth, you only pay taxes:
R=Roth_amount
R=W-T=W-W*t=W*(1-t)
If you then withdraw from the Roth before the 5 year rule is satisfied, you pay a penalty on the amount pulled out:
N=R-P=R-R*p=R*(1-p)
But the Net amount is more than a direct IRA withdrawl (or the initalnwithdrawl needed is less).
N=R*(1-p)=W*(1-t)*(1-p)=W*(1-t-p+t*p)
W=N/(1-t-p+p*t)
The p*t term reduces the amount of inital withdrawal for a specific post tax&penalty amount on hand. The higher the tax rare, the more the impact:
At 37% tax rate (ignoring any state taxes):
IRA: W=N/(1-.37-.1)=1.89*N
Via intermediary Roth: W=N/((1-.37)(1-.1))=1.76*N
For a 1-(.76/.89) = 15% reduction in tax&penalties.
Still 31% worse than waiting out the penalty:
W=N(1-.37)=1.58N
But if one had to access funds soon, it seems a better option.
Or am I missing something?
What I conclude from my due diligence is this.
If you’re over 59 1/2 and take a distribution from a Roth IRA that was funded via rollover and 5 years have not passed since the rollover:
* the 10% penalty would not apply as you say
* principal distributed would be tax free (because previous gains had been taxed at the rollover)
* earnings from the time of rollover would be taxable if distributed before 5 years.
I’m a little less clear on the rule wrt multiple conversions. I think it only matters wrt to the 10% penalty. That is, you could take earnings from a conversion tax free in less than 5 years, if the Roth account was at least 5 years old.
That is to say, you‘re not locking up your principal for 5 years if you do a rollover (once you’re 59 1/2).
Here is my Roth IRA story. Back in 2011 or 2012, I rolled over my accumulated career contributions (to 403b and 457) after a 40 year career in teaching and administering in a community college. I had tried to put the maximum amount each year that I could afford into the tax deferred accounts. In addition, I saved money outside my tax deferred accounts. When the rules changed to allow rolling over the tax deferred accounts into a Roth (after first rolling them into a regular IRA), I did so, paying the income tax due (a quite large amount) from my funds which were not in the tax deferred accounts. This allowed me to maximize the size of the Roth IRA. I was 66 at the time, and it was clear that my pension would be sufficient to keep my lifestyle. The Roth had the advantage of not being subject to the RMD requirements that I would be facing in a few years and would be a great estate planning tool, with the advantage that I could access the funds if there was an emergency. At that time, the Roth rules allowed passing the shares to my grandchildren and they could let the investment grow through their lifetimes with small annual withdrawals (now changed to 10 years after my death).
In 2013, after purchasing a Model S (the most expensive car I had ever bought), I saw that TSLA shares might be a good investment for the future. I dawdled and saw TSLA jump from around $35 presplit to $180 in November 2013. There was some big FUD in mid November which I knew was not true and the price dropped to $130. I made the momentous decision to invest slight more than half of the Roth to buy 1500 shares. They fairly quickly went up some and I had a little profit. Early in 2015, after TSLA had gone up to over $200 and again dropped down, I put the rest of the Roth into TSLA shares, this time 957 shares. Total average cost was $153 per share. My career tax deferred savings were equal to 3.8 Tesla Model S's (calculated at $100K per car.) I was hoping that over the next year or two, that I would gain one Tesla Model S in value for my investment. My TSLA shares did make that gain, but then basically didn't do anything for four and a half more years. I stopped looking at the price of the stock.
Then starting in the fall of 2019 things started to happen. By Christmas, when my daughter and grandkids arrived for the holidays, my 3.8 TeslaS investment had crossed the 10 TeslaS level. I thought I was to the moon. Fast forward to this past week. Today, now post split I have 12285 shares, worth 137 TeslaS, a 36 times gain, with the gain last week of 22.8 TeslaS or six times my entire 40 year career tax deferred savings.
Since Tesla and TSLA came along quite a bit later in my life than many of you, I probably won't be around as long to share in the experience of all of their future, including how Tesla benefits the world for my daughter and grandkids.
There are a few things that I have learned about the use of the Roth. First, currently it is an excellent estate planning tool, particularly with not having the RMD provision. Second, the drop to 10 years of tax free growth for beneficiaries after death does reduce the benefit. Third, it can be a safety net if you have held it long enough and are of sufficient age. Fourth, holding TSLA in the Roth brings up the issue of Estate Tax, which I didn't think was going to be an issue. Fifth, if you just keep your retirement funds in a regular IRA (or similar tax deferred account), not only do you have the RMD issue, but the potential complexities of both higher estate tax and further income tax that your beneficiaries may have to pay after your death.
Lastly, we have lived well within our means and saved substantial amounts of our income over the years. If you qualify for 401k, 403b, 457, etc. and can maximize your savings, then you have the double advantage of having extra savings and learning to be comfortable with spending less.
In 2013, after purchasing a Model S (the most expensive car I had ever bought), I saw that TSLA shares might be a good investment for the future. I dawdled and saw TSLA jump from around $35 presplit to $180 in November 2013. There was some big FUD in mid November which I knew was not true and the price dropped to $130. I made the momentous decision to invest slight more than half of the Roth to buy 1500 shares. They fairly quickly went up some and I had a little profit. Early in 2015, after TSLA had gone up to over $200 and again dropped down, I put the rest of the Roth into TSLA shares, this time 957 shares. Total average cost was $153 per share. My career tax deferred savings were equal to 3.8 Tesla Model S's (calculated at $100K per car.) I was hoping that over the next year or two, that I would gain one Tesla Model S in value for my investment. My TSLA shares did make that gain, but then basically didn't do anything for four and a half more years. I stopped looking at the price of the stock.
Then starting in the fall of 2019 things started to happen. By Christmas, when my daughter and grandkids arrived for the holidays, my 3.8 TeslaS investment had crossed the 10 TeslaS level. I thought I was to the moon. Fast forward to this past week. Today, now post split I have 12285 shares, worth 137 TeslaS, a 36 times gain, with the gain last week of 22.8 TeslaS or six times my entire 40 year career tax deferred savings.
Since Tesla and TSLA came along quite a bit later in my life than many of you, I probably won't be around as long to share in the experience of all of their future, including how Tesla benefits the world for my daughter and grandkids.
There are a few things that I have learned about the use of the Roth. First, currently it is an excellent estate planning tool, particularly with not having the RMD provision. Second, the drop to 10 years of tax free growth for beneficiaries after death does reduce the benefit. Third, it can be a safety net if you have held it long enough and are of sufficient age. Fourth, holding TSLA in the Roth brings up the issue of Estate Tax, which I didn't think was going to be an issue. Fifth, if you just keep your retirement funds in a regular IRA (or similar tax deferred account), not only do you have the RMD issue, but the potential complexities of both higher estate tax and further income tax that your beneficiaries may have to pay after your death.
Lastly, we have lived well within our means and saved substantial amounts of our income over the years. If you qualify for 401k, 403b, 457, etc. and can maximize your savings, then you have the double advantage of having extra savings and learning to be comfortable with spending less.
That all looks correct to me. Only conversion amounts are treated differently, earnings on conversions are treated the same. Two 5-Year Rules For Roth IRA Contributions & Conversions
Withdrawl order is treated as: What Are Roth Ordering Rules?
Contributions (Never have a fee or tax)
Conversions (never a tax, but a fee if under 5 years and under 59-1/2)
Nontaxable conversions (???)
Earnings (taxed if under 5 years from Roth creation, penalty if under 59-1/2)
US taxes.
I am considering closing/closing some DITM Calls at @450 jan 23 strikes next week when they qualify for long term capital gains after end of this week.
Any benefit to just closing the position and paying the 20% capital gain?
I could exercise, but I am not sure if I will be able to hold on to the stock for 1 year plus based on my other trading strategies. So After exercising, if I have to sell these stocks I would have to pay long term cap gains .. is my understanding...?
So any advantage to biting the bullet, closing the call and paying the long term cap gains. And then opening other call positions independently?
I am considering closing/closing some DITM Calls at @450 jan 23 strikes next week when they qualify for long term capital gains after end of this week.
Any benefit to just closing the position and paying the 20% capital gain?
I could exercise, but I am not sure if I will be able to hold on to the stock for 1 year plus based on my other trading strategies. So After exercising, if I have to sell these stocks I would have to pay long term cap gains .. is my understanding...?
So any advantage to biting the bullet, closing the call and paying the long term cap gains. And then opening other call positions independently?
Knightshade
Well-Known Member
My understanding is if you exercise, the new shares are "new" and you'd have to wait 1 year from exercise to be able to sell those at LT cap gains rates- selling before and it's short term (ie generally much higher normal income tax rates).
Exercising you lose any remaining time value- which for a Jan 23 450 won't be a TON, but it won't be nothing either.
If you expect you might need to sell any exercised shares within the next year anyway why not just keep the calls? Then any sale in the next year gets you the same (or slightly more for time value) profit as selling shares would, while insuring it's still LT gains.
Exercising you lose any remaining time value- which for a Jan 23 450 won't be a TON, but it won't be nothing either.
If you expect you might need to sell any exercised shares within the next year anyway why not just keep the calls? Then any sale in the next year gets you the same (or slightly more for time value) profit as selling shares would, while insuring it's still LT gains.
I have loads of stuff expiring in Jan 2022 ranging from 100c to 500c, so I've given this some thought too. In California, my LTCG tax rate is 42% which is higher than Virginia, but some of the considerations may apply.
1. If exercising, this year, the stock can be sold late 2022 for LTCG, as opposed to 2023 for LTCG. Depending on how tax legislation goes next year and your income, that may make a difference.
2. If you're closing, time value is negligible compared to daily TSLA fluctuations of 1-5%.
3. Closing next year may give you more capital to work with, because taxes won't be due as soon and you can keep working with that money. Plus, if any trades end up as a loss, you'll have a whole year to write off those again the gains.
Other factors include your state income tax, whether you're being taxed quarterly, the impact of unpaid tax interest of 5-6%, and whether your income subjects you to the additional 3.8% investment income tax. There's also the question of whether LTCG will be 25% this year or 20%, which again depends on income.
Finally, it doesn't need to be all close or exercise. You can exercise some, and close the rest.
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